Real GDP Was Unchanged in April but Is Likely to Resume Growth in May

Insights

While real GDP was unchanged in April, preliminary estimates show it will increase in May. This demand continues to put upward pressure on consumer prices in the country. The good news is that inflation cooled to 3.4 per cent in May, year over year, the smallest increase since June 2021, primarily due to base year effects. However, service prices such as accommodation and travel services remain elevated. Combine this still strong internal demand with a resilient job market, and this may lead to another rise in interest rates. Last month the Bank of Canada resumed increasing rates in May after a four month pause. The Bank felt that the monetary stance is not tight enough to continue to bring down inflation and reach its 2-percent annual inflation target.

One important factor that is contributing to the solid output growth seen so far is higher immigration levels. After the drop in immigration during the height of the COVID-19 public health restriction, immigration has rebounded from both the lifting of these restrictions and from the federal government increasing its targets. Faced with the growing pressures of an ageing population, this is a prudent response. Subsequently, this is putting upward and downward pressure on interest rates in the country. For example, employers benefit from the increased labour supply relieving pressure to raise rates. Still, the opposite effect is also occurring as it is also putting pressure on housing demand in the country. In the future, this will continue to have far-reaching impacts on our economy, but it is too early to see how these forces play out over the medium term.

Over the coming months, the Canadian wildfires will likely have negative impacts on economic growth. Wildfires impact road closures, the forestry industry, damage to communities, and keep people from going outside to enjoy summer activities such as travelling. This isn’t good news for the leisure and hospitality sectors as it was counting on a good summer due to pent-up demand, as it still hasn’t fully recovered from the pandemic. It is difficult to estimate how much climate change impacted these wildfires, but incidents like this will likely increase in the future from its effects. Therefore, climate change initiatives are ever more important as we now see direct economic consequences.