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Canada economy on track to beat first-quarter forecasts



The Canadian economy appears to be maintaining its momentum, showing robust growth in the initial months of this year. This positive trend is strengthening the Bank of Canada's argument for maintaining a cautious approach towards interest rate adjustments.


Preliminary figures indicate that the gross domestic product (GDP) increased by 0.4 percent in February, supported by gains across various sectors such as oil and gas, manufacturing, and finance, as reported by Statistics Canada. This growth follows a solid 0.6 percent expansion in the previous month, surpassing the expectations of economists surveyed by Bloomberg.


The upward trajectory in GDP was primarily driven by a rebound in education activities following strikes in Quebec, contributing to January's growth. Although December saw a slight contraction in GDP, the overall trend suggests the strongest growth since early 2022, during the post-pandemic recovery phase.


Looking at the broader picture, the data suggests that the Canadian economy is on track to outperform forecasts for the first quarter of 2024. If March's output remains stable, the quarter could witness an annualized growth rate of 3.5 percent, significantly higher than the consensus estimate of one percent.


This positive economic performance provides the Bank of Canada with breathing room regarding potential interest rate adjustments. Policymakers are adopting a wait-and-see approach, prioritizing the collection of more data to ensure the sustainability of the downward trajectory towards the two percent inflation target before considering any changes to borrowing costs.


Recent indicators, including inflation levels within the bank's target range and a cooling in core inflation, support the current stance on interest rates. Additionally, population growth outpacing employment, coupled with softening wage growth, indicates a need for cautious monetary policy.


Prime Minister Justin Trudeau's government's recent announcement to reduce the temporary resident population is expected to have implications for economic growth in the coming years, potentially mitigating upward pressures on housing prices.


In January, various sectors contributed to the overall growth, with services-producing industries leading the way, particularly in education and healthcare. Manufacturing rebounded from previous declines, while real estate activity remained strong, notably in key markets like the Greater Toronto Area.


However, certain sectors experienced setbacks, notably oil and gas extraction, which saw declines in both overall extraction and oilsands activities.


Looking ahead, the Bank of Canada's upcoming rate decision in April will be closely watched, with economists anticipating a continuation of the current policy stance. As the economic landscape continues to evolve, policymakers will remain vigilant, ensuring that monetary policy supports sustainable economic growth in Canada.


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