Canada’s central bank is going to be more comfortable holding off on rate cuts. Statistics Canada (Stat Can) data shows real gross domestic product (GDP) surged in January, defying analyst expectations. Over just two months, 2024’s growth is already equivalent to all growth seen in 2023. However, it’s not clear how the momentum continues since most of the growth was driven by the public sector.
Canada’s Economy Grew Much Faster Than Expected
Canada’s economy is expanding much faster than analysts have anticipated. Real GDP grew 0.6% in January, rising 50% more than last month’s preliminary data had suggested. The agency’s preliminary data estimates 0.4% growth for February. It may be hard to appreciate just how large this was without context, but it was huge.
“To put that two-month flurry of growth into perspective, the combined 1.0% gain is as much as the economy grew in the entire 12 months of 2023,” explained Douglas Porter, chief economist at BMO.
If the current data holds, real GDP forecasts will require significant upward revisions. If February is confirmed and March is flat, he estimates annualized growth will reach 3.5% for Q1. That could make Canada the fastest growing economy in the G7, though the bank wasn’t sold on the need for revisions yet.
He adds the caveat, “Of course, this hinges on whether a) the February strength is confirmed, and b) that the early-year strength is not simply a statistical illusion.”
Growth Factors Due Primarily To Temporary Drivers
That’s not just economists playing devil’s advocate. The latest data is primarily making large, volatile movements due to temporary factors when it comes to both growth and downward pressures.
January growth was driven by the Public Sector (+1.9%), representing 0.4 points of the 0.6 points of growth. The segment includes education, healthcare, social assistance, and public administration. The end of Quebec’s public sector strike drove most of the growth in January, emphasized by the drag it produced in the two months prior.
Public Sector Drove Canadian GDP Growth
Main industrial sectors’ contribution to the percent change in gross domestic product in January
Source: Statistics Canada.
The second-largest growth pressure was manufacturing (+0.9%) in January. Stat Can attributed this largely to transportation equipment manufacturing. Autoworkers resumed activity after a partial shutdown due to retooling of equipment.
On the flip side, temporary factors also provided downward pressure for real GDP. The largest-decline was seen in Mining, Quarrying, and Oil & Gas (-1.9%), following record growth in December. A decline may present concern, but not if it’s just balancing a year-end move a few week’s prior.
Bank of Canada May Be More Comfortable With Rate Cut Delays
Canada’s bigger-than-anticipated growth is likely to have a mixed reception at the Bank of Canada (BoC). Growth is much higher than their forecast, lightening any pressure they may feel to make premature cuts to interest rates. At the same time, they may consider this “transient” growth, and might be right this time.
“The surprisingly healthy start to 2024 points to above-potential growth in Q1, which could make the BoC a bit less comfortable with the inflation outlook. Our call for a June rate cut still hinges on the coming CPI reports, but if this strength in activity is close to replicated into Q2, the BoC will see much less urgency to cut rates any time soon,” explained Porter.
The Public Sector drove growth. In summary, the Trudeau government has increased the federal public service by over 98,000 employees since taking office in 2015. The federal public service now has 357,247 employees, nearly 40% larger than in 2015 when the Liberals took power when it counted 257,034 employees. The cost of maintaining the federal bureaucracy has risen alongside the increased employee headcount. Operational spending for public service grew 32% from 2019-20 to 2021-22, with over half of that spending directly related to personnel costs. With the April Fool’s Day pay increase on April 1, 2024, Canadian parliamentarians will become the second-best-paid elected officials in the world after Americans.
Why not use the Greek model? Worked great for them. If we all get government jobs maybe GDP can grow 50% annually, right???
Yes, the growth is good, When I saw the preliminary estimate of 0.4% growth for January with the December 2023 update, I thought this was likely too strong, and it turned out that January growth was even stronger when the actual estimate came in, rising to 0.6%. At the same time, the revisions to 2023 were mostly downward, removing $769 million of output on balance for 2023; in December the growth rate went from nil to -0.1%. Since the government tells us robotically that climate change is happening, Doug may well be right that part of the high growth in January and February may be due to seasonal adjustment, and revised seasonal factors will dampen this growth.
Finally, even if the 0.4% growth rate is achieved (this is 4.9% annualized, and much above our potential growth rate), the growth rate per capita, based on growth in the active LFS population, will only be a not so spectacular 0.15% (1.8% annualized) and Canada will still have a GDP per capita 1.9% lower than it was in the peak month of February 2020. The actual growth rate will have to be at least 3% annualized in February just to keep GDP per capita from declining.
Thank you for the comment. Very enlightening!
Hiring thousands of casual federal workers doesn’t improve GDP per capital in the long run.
You know it’s bad when federal unions are telling full time indeterminate workers that the new hires are coming to take their jobs. Literally a South Park parody.
Something else, always overlooked by “you people” is that from May to year’s end, 80 % of film and television production was shut down due to the strikes in the US. If Downsview were a factory and all us film and TV people drove to that one place each day, there’d be about 15,000 people a day working there. BC is an even larger production hub. It’s about a 6 billion dollar hit to the economy…
Public growth is borrowed money.
Exactly! Public sector growth is not that good. It doesn’t produce anything. It burdens the tax payers. More government is never good in the long run. We need less government and less deficit spending.
Exactly. Government jobs produce nothing but more taxes for you and I
Why isn’t it being mentioned that the bulk of the growth being the private sector, is not a productive asset for continuous sustainable GDP growth?
What the hell do people learn in university that disconnects them from reality? We don’t live in formulas.
Or do we?……