Canada’s largest bank is starting to think the economy is doing much better than previously thought. RBC wrote to investors this afternoon, outlining its expectations for the central bank’s next rate announcement. The bank’s economists expect GDP data to be more robust than previously anticipated after strong inflation data. As a result, the Bank of Canada (BoC) is seen hitting pause on rate cuts as long as tariff talks don’t derail investor sentiment.
“Canadian gross domestic product will be in focus after firmer labour market reports in December and January, and an upside headline inflation surprise increased the odds that the Bank of Canada will forego another rate cut in March,” explained RBC assistant chief economist Nathan Janzen.
All eyes are on the indicator released at the end of this week. RBC economists see real GDP quarterly growth at 1.5% for Q4 2024, primarily due to household strength. They anticipate consumer spending will come in at 3% for Q4, the biggest jump since Q3 2021—and rates are considerably higher. Residential investment is also expected to be a solid contributor, as home sales continue to recover.
The bank does anticipate some weak spots. Janzen warns of negative business investment plans in 2025, especially amongst business and machinery investment, critical for productivity improvements. He also notes that labor markets have improved, hours worked declined by 0.2% in Q4—the first drop of 2024.
Structurally, that thesis presents some issues. Most growth is related to credit consumption, fueled by future productivity. At the same time, investments in productive business gains are being avoided by businesses. That’s tomorrow’s problem though, with the bank focused on the expected near-term growth.
“We expect the signs of life in the household sector and upside inflation surprises in recent months will be enough for the BoC to stand pat on interest rates in March for the first time since June 2024,” explained Janzen.
The recent acceleration of inflation is perceived as a negative, but it serves as a sign of consumer strength. Consumer demand is strong enough to firm an oversupply, indicating economic threats haven’t deterred them. The recent GST/HST holiday also artificially suppressed some CPI data points, meaning households are consuming even faster than the headline data implies.
Last month the BoC justified its cut largely as a prophylactic for tariff threats. It looks a little excessive in the face of recent CPI data, but that doesn’t mean households are entirely in the clear from tariffs.
“The potential for significant tariff hikes remain a downside risk to economic growth and the interest rate outlook, but absent a trade shock, economic data is suggesting Canada’s economy may be faring better than initially feared,” explained Janzen.
The issue is that the boc is relying on sc cpi which we know us wrong. It is also relying on consumer continuing to borrow despite high rates to fund purchases.
The main rationale is that hpusing prices will rema8n stable or rise. The problem is with cpnsumer debt already stretched to the max, the medium term goal for the boc should be removing credit risk. The multiple of housonf price to income is far far tpo high, and needs to be reduced.
Finally, while much of the rhetoric about trumps tariffs has been on investments in infrastructure to open new markets to our respurces. However, this doesnt fit witg an economy whete almost all net new investment is in non prodictive resodential real estate. To build refineries, pipelines, smelters, and rail requires more than promisez and hopes.
We can see how tge tmx has been tbe only useful investment by the current govt in 10y, despite a terr8ble job of mansgongbthe project, it will pay fpr itself in 10y.
We cant afford any more idiots in ottawa who think they know how to invezt, we need to let professionals do this.
Oh sure, attempt micro manage an economy with frequent rates changes, for made-up reasons, when rate changes take years to implement. Forget about monetary stability, or confidence or trust or predicable; those are just nuance ideas anyways.
What a sad clown show.
The January inflation data don’t really point to an economy operating on all cylinders that doesn’t need any monetary stimulus. Including mortgage interest in the target inflation indicator and the operational guide makes no sense at all. If you look at the CPI ex mortgage interest cost inflation rate, it is 1.5% in January, up from 1.3% in December. If you take out the tax-related components that have nothing to do with market pricing (property taxes, vehicle registration fees and drivers’ licences) the inflation rate in January is just 1.3%, up from 1.2% in December. This is mostly due to the removal of property taxes, which shows a 6.0% inflation rate in both months.
The new definition of the operational guide, which now excludes CPI-common, shows a 2.7% inflation rate for January, up from 2.6% in December. Oh, that persistent core inflation! What should we do about it? But when you go back to the CPIX measure, which was the operational guide until 2017, the inflation rate is only 2.1%, up from 1.8% in December. And again, if one also removes tax-related components from the CPIX core inflation measure, the inflation rate for January is just under 2.0%, up from 1.6% in December.
Economy stronger than previously thought … LOL.
More likely that the Cdn dollar is weaker than previously thought.
As Canadians spend more time and money at home the Canadian economy will get a much need boost at the expense of the Americans who has antagonized Canada and the rest of the world to shed our relations with our southern neighbours to find and form new strategic alliances. We as Canadians have always overcame adversity to become a great nation. Although not perfect Canadians strive to become a more tolerant society with a distinct Canadian identity. No one can take that away from Canada no matter how much they slander us.