Canada’s economic landscape is expected to face a period of subdued growth, as the outlook for business investment remains muted. The latest market expectations indicate that there is more than a 50% chance of the Bank of Canada (BoC) implementing a 25 basis point (bps) policy rate cut in March. Over the next 12 months, markets are pricing in a total of 60bps of easing, up from the 40bps anticipated earlier this week. However, despite these expectations, we predict that the BoC will likely hold off on further rate cuts at its upcoming meeting on March 12. A key factor in this decision is that core inflation—measured by the average of the trim and median Consumer Price Index (CPI)—is tracking above the Bank’s first-quarter projection of 2.5%.
Meanwhile, Canada’s economic data for January is due today, with monthly and quarterly GDP figures set to be released. According to advance estimates from Statistics Canada, real GDP by industry grew by 0.2% month-over-month (m/m) in January, a recovery from the 0.2% contraction seen in November. This positive movement in January will be accompanied by the official publication of the GDP estimate for that month.
Looking back to the fourth quarter of 2024 (Q4), the Bank of Canada had projected a modest 1.8% seasonally adjusted annualized rate (SAAR) growth in real GDP by expenditure. This marks a significant improvement over the 1.0% growth in the previous quarter (Q3), driven by stronger consumer spending, residential investment, and net exports. However, despite these positive contributions, business investment remains sluggish, continuing a trend of weak corporate spending. Moreover, inventory destocking is expected to be the primary drag on overall growth during Q4.
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In summary, while certain segments of the Canadian economy are experiencing growth, business investment remains tepid, and broader economic activity is likely to face headwinds. The central bank’s policy stance, closely tied to inflation dynamics, will play a crucial role in shaping the economic trajectory in the months ahead. With the BoC expected to pause rate cuts for now, it remains to be seen how these factors will interact to influence Canada’s economic performance in the coming year.
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