Canada Economy Begins to Stall as Higher Interest Rates Bite

Canada Economy Begins to Stall as Higher Interest Rates Bite

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(Bloomberg) — Canada’s economy geared down as expected in the first quarter, reinforcing the central bank’s decision to stop raising interest rates.

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Preliminary data suggest gross domestic product contracted 0.1% in March, led by decreases in retail, wholesale and mining sectors, Statistics Canada reported Friday in Ottawa. That followed a 0.1% expansion in the previous month, slightly weaker than expectations for 0.2% growth in a Bloomberg survey. 

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Overall, the monthly gains point to annualized growth of 2.5% in the first quarter, according to an initial estimate from the statistics agency. Though it will likely be revised, that’s roughly in line with the 2.3% pace projected by the Bank of Canada earlier this month. 

Bonds rallied, pushing the yield on Canada’s two-year benchmark bond down to 3.684% as of 8:44 a.m. Ottawa time.

The numbers will give Governor Tiff Macklem and his officials some confidence as they look for evidence that monetary policy is sufficiently restrictive to bring inflation back to the central bank’s 2% target at the end of 2024. Signs of cooling growth, employment and underlying price pressures will keep them on the sidelines. 

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During their deliberations ahead of the April 12 decision to hold the benchmark overnight rate at 4.5%, policymakers considered raising borrowing costs higher, citing stronger-than-expected growth and still-elevated core inflation. But they opted to stand pat, expecting that pressures on the labor market and consumer prices will ease in the months ahead.  

“The shaky March data will reinforce the Bank of Canada’s decision to hold rates steady at its last policy announcement,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a report to investors. “That said, it’s not yet enough to move central bankers to completely close the door to future rate increases.” 

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In February, the public sector expanded 0.2%, up for the thirteenth straight month. The construction industry grew 0.3%, while wholesale, retail, and manufacturing declined by 1.3%, 0.5% and 0.1%, respectively. 

(Updates with more details, economist comments and market reaction.)

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