Synopsis:

CIBC analyzes the recent Canadian GDP data for February and the advanced estimate for March, noting a quick fading of economic momentum as Q1 progressed. The implications for upcoming Bank of Canada (BoC) policy shifts are discussed, with potential rate reductions on the horizon.

Key Points:

• GDP Growth Fades: February's GDP growth in Canada was modest at 0.2%, slightly below consensus forecasts, and following a downward revision of January's growth from 0.6% to 0.5%. The advance estimate for March suggests that economic activity may have stalled, indicating a weakening momentum as Q1 concluded.

• Sector Performance Variations: Key sectors such as mining, oil & gas, and air transportation showed strength in February, contrasting with declines in utilities and manufacturing. The transportation manufacturing sector, in particular, experienced a notable drop due to ongoing retooling shutdowns, affecting overall manufacturing output.

• March's Flat Growth Estimate: The advance estimate for March indicates no change in GDP, with declines in manufacturing and retailing contributing to the stagnation. This suggests a weak end to the quarter, potentially affecting projections for Q2.

• Economic Implications: The overall Q1 GDP growth is now estimated at a 2.5% annualized pace, weaker than initial estimates and just below the BoC's 2.8% forecast in its April Monetary Policy Report. The slowdown towards the quarter's end poses downside risks to the BoC's Q2 growth expectation of 1.5% annualized.

• Potential BoC Policy Response: Given the waning economic momentum and assuming inflation remains controlled, CIBC suggests that the BoC might commence a gradual reduction in interest rates starting from the June meeting. This adjustment would aim to stimulate economic activity in response to the observed slowdown.

Conclusion:

The recent Canadian GDP data highlights a rapid loss of economic momentum in early 2023, prompting CIBC to predict potential easing of monetary policy by the BoC. With key sectors showing mixed performance and overall growth tapering off towards March, the central bank may need to adjust its strategy to support the economy.