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The stage looks set for Canada’s economy to shrink in the second quarter as the strike by federal public sector workers takes a bite out of the economy and growth in the services sector begins to slow.

The national data agency released the advanced estimate for March on April 28, along with results for February showing the economy clinging to growth as it expanded 0.1 per cent from the month before, missing StatsCan’s early estimate for February of 0.3 per cent growth. Analysts had called for an increase of 0.2 per cent month over month in February.

“With the preliminary estimate pointing to a contraction in March and activity set to suffer in April due to the federal workers’ strike, GDP growth is likely to turn negative this quarter,” said Stephen Brown, economist for Canada at Capital Economics.

Charles St-Arnaud, chief economist at Alberta Central, said in a note on April 28 that GDP for the second quarter will likely come in flat based on the “negative economic impact” of the strike and March’s expected pullback in growth.

The public sector boosted GDP in February, but economists expect the on-going PSAC strike will slow growth this month. “It’s quite possible that April will also see a small dip in monthly GDP,” said Douglas Porter, chief economist at BMO Economics.

Services also showed signs of being a future drag on economic growth.

Brown of Capital cited evidence that the high-contact services sector — “a key driver of overall growth in recent months” — lost steam in February. While overall, services grew 0.1 per cent in February, declines were recorded in several sectors including retail and wholesale trade, arts and entertainment, transportation and hotels and restaurants.

The weakness seen in discretionary consumer spending are “likely the result of the loss in purchasing power due to high inflation and rising debt-service cost,” said St-Arnaud. “Household spending remains key to the outlook and is likely supported so far by the strong labour market.”

StatsCan forecast GDP of 0.6 per cent in the first quarter, that economists said translated into an annualized rate of 2.2 per cent to 2.5 per cent — pretty much in line with the Bank of Canada’s estimate of 2.3 per cent.

If GDP contracts in March it will be the first time growth has landed in negative territory since October 2022. Economists have been persistently calling for a recession — two consecutive quarters of negative GDP — to hit the Canadian economy since last year.

Here’s what economists are saying about the GDP numbers and what they mean for the Bank of Canada and interest rates.

Charles St-Arnaud, Alberta Central

“The reduction in the momentum of the Canadian economy will be welcomed by the Bank of Canada, as it suggests that it was right to remain on hold at the April meeting to better assess the impact of the increases in interest rates on the economy. We continue to believe that the BoC will leave its policy rate unchanged for the rest of the year.”

Stephen Brown, Capital Economics

“The preliminary estimate for March implies that GDP declined by 0.1 per cent m/m last month. While that is still consistent with 2.5 per cent annualized growth in the first quarter – a little stronger than the two per cent gain we pencilled in – it sets the stage for a much weaker second quarter. GDP could decrease by as much as 0.3 per cent m/m this month as a result of the federal workers’ strike. Even if the strike is resolved this weekend and GDP fully rebounds in May, GDP would still be on track to decline in the second quarter.”

Nathan Jazen, RBC Economics

“The surge in GDP in January increasingly looks to have been a head-fake, with activity softening over February and March. And consumer spending headwinds continue to build as higher interest rates flow gradually through to household borrowing costs with a lag. With GDP growth tracking weak momentum into Q2, the BoC isn’t expected to hike interest rates again. Although inflation is also still too firm to justify a quick shift to cuts, even with the economy showing signs of softening.”



Douglas Porter, BMO Economics

“The economy clearly lost momentum as Q1 progressed, even as employment continued to roll along. So, even as Canada will post healthy Q1 GDP growth of roughly 2.5 per cent (versus 1.1 per cent stateside), that sturdy advance was weather-aided and does not look sustainable. In fact, the public sector strike heightens the odds that Q2 will post a small decline (albeit the strike drag should prove fleeting). Against this backdrop, the BoC is expected to remain on hold, assuming inflation continues to recede and notwithstanding their tough talk on the possibility of further rate hikes.”

Marc Ercolao, TD Economics

“Today’s GDP numbers corroborate the BoC’s recent guidance that monetary policy may need to be ‘restrictive for longer’. This doesn’t necessarily mean additional rate hikes are on the table, but it does provide further evidence that the start of rate cuts are less likely to occur in 2023. Our view is that the BoC will hold the policy rate into 2024 as lagged effects of interest rate hikes still need time to work their way through the economy.

“The federal public service strike, affecting some 100,000 workers, enters into its tenth day and negotiations are still ongoing. By loose estimation, a strike of this duration could shave 0.2 percentage points off of April’s GDP. However, as workers come back on the job, growth in subsequent months would be boosted.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada Economics

“While the quarterly advance was solid, the economy lost momentum in the quarter. This poor hand-off to the second quarter is consistent with our view that GDP will stall in the three months to June. The rate hikes have been very aggressive and will continue to weigh on the economy given the lag in their pass-through. In addition, the outcome of the ongoing turmoil in the U.S. banking sector and its impact on credit conditions in the coming months remains uncertain.”

“All of this considered, we continue to expect a sluggish economy over the next year which should translate into anemic growth of 0.9 per cent in 2023 and 0.5 per cent in 2024. This, combined with further progress on inflation, should allow the Bank of Canada to begin cutting rates in the final quarter of the year.”


Story by: Financial Post