Canadian rates stay put, while U.S. economy beats even the most optimistic views

• The Bank of Canada held its rate steady as inflation fight nears end and recession concerns rise, subtly acknowledging an economic stall in Canada.
• Contrary to forecasts, the U.S. economy surged 3.3% in Q4 2023, powered by robust consumption, exports and government outlays.

There should be no surprise that the Bank of Canada (BoC) continued to hold firm on its overnight rate. With the inflation fight seemingly won, the next consideration for the BoC will be whether cuts are needed to avoid pushing the economy deeper into recession. 

The tone of the BoC’s statement said it all. It outlined the case for slower global growth while seemingly acknowledging that the Canadian economy is in a recession. With comments that the “economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024,” the BoC is all but using the “R” word.

Inflation was well within the BoC’s target range, at 2.5% on a year-over-year basis. The BoC stated that the Governing Council wants to see further and sustained easing in core inflation while also highlighting that shelter costs remain the biggest contributor. We might have believed that rate cuts are further out, if not for the already weakened economy. 

South of the border, we had new gross domestic product (GDP) numbers. Many expected a sharp slowdown after a 4.9% surge in the third quarter. Instead, the Bureau of Economic Analysis reported an impressive 3.3% expansion. This surprised many economists and Wall Street strategists who had anticipated a much lower number, around 2%. In fact, the most optimistic of all Wall Street economists had predicted 2.5%. Personal consumption was a significant driver, contributing 1.91% to the growth, translating to a 2.8% annualized increase. This was higher than the expected 2.5% but a decrease from the previous quarter's 3.1%.

The change in private inventories remained stable and contributed 0.07%, despite expectations of a decline due to destocking. Similarly, the net exports sector defied predictions by adding 0.43% to the growth — a substantial increase from the previous quarter's 0.03%, as exports surged despite the U.S. dollar's significant rise in the fourth quarter.

Lastly, government spending continued to play a substantial role, contributing 0.56% to the growth. Although this was lower than 0.99% in the third quarter, it highlighted an ongoing trend where government spending remains a major contributor to GDP.

Listen to this week’s podcast for further insights.