First National Financial LP

Residential Market Commentary - GDP’s double-edged sword

  • First National Financial LP

The latest numbers from Statistics Canada show the country’s economy continues to chug along despite very deliberate efforts to slow it down.

Gross Domestic Product (GDP), which measures the total value of all goods and services produced by the economy, rose by 0.5% in January.  Early indications are it was up by another 0.3% in February.  The first quarter of this year is on track to see GDP grow at an annualized rate of 2.5%.  The Bank of Canada had forecast growth of about 0.5%.

The unexpected resilience of the Canadian economy is buoying hopes for a, so-called, “soft landing” as the BoC works to bring inflation down.  There have been numerous forecasts that say the central bank’s rate hiking policy will push Canada into recession and unemployment will rise.  Some of those predictions are softening and the fear of significant job loses is fading.  But analysts still expect there will be an economic slowdown and, perhaps, a mild recession later this year as the effects of the Bank’s rate hikes work their way through the overall economy.

The BoC has paused its rate increases, for the time being.  But it has made it clear more hikes will come if they are deemed necessary.  The Bank’s trend-setting policy rate is now 4.5% and inflation has dropped to 5.2%.  The Bank expects it to fall to 3.0% later this year.  Target is 2.0%.

If economic growth remains stronger than expected and high inflation persists the BoC could be forced into the tough position of having to raise interest rates at the risk of pushing the country into a real recession.  In others words, a “hard landing”.

For now, the Bank is expected to leave its rate unchanged at the next setting on April 12th.