GDP rises 0.3% in April, won't derail BoC rate cuts

The latest data piece to the Bank of Canada’s rate puzzle was released today, adding further insight as to whether the central bank will cut borrowing costs for a second consecutive time in July.

The latest Gross Domestic Product (GDP) report shows the economy grew 0.3% in April, which was largely in line with economists’ expectations. This follows flat growth in March.

Fifteen of the 20 sectors tracked by Statistics Canada increased over the course of the month, with both goods-producing and services-producing industries posting 0.3% gains.

Wholesale trade, mining, quarrying, oil and gas, as well as manufacturing were the largest contributors to increased GDP, after declining in the previous month. Retail trade also saw a bounce back, led by food and beverage retailers, as well as gas stations.

Home construction falls most since May 2023

The construction sector, however, fell 0.4%, down from a booming March, which showed the largest growth rate of October 2022. The decline was largely due to falling residential construction, which decreased 2.3% – its largest decline since May 2023, and 24% below the peak observed in April 2021.

StatCan expects that GDP will rise by another 0.1% in May, with anticipated increases to come in the manufacturing, real estate, rental and leasing, and finance and insurance sectors.

What does this latest GDP report mean for mortgage rates?

GDP is one of the metrics closely watched by the Bank of Canada when determining whether to cut, hike, or hold its trend-setting interest rate. It’s a key measure of whether the economy is on track for robust growth or is losing steam – and while the former is generally positive for Canadians, the central bank actually wants to see a weaker performance at the moment.

This is because the BoC has been fighting to pull down the growth rate of inflation to its ideal target of 2% – and a lower GDP indicates that consumer activity is cooling, which reduces the chances the central bank will need to hike its benchmark rate, which controls the Prime rate and price of variable interest rates. The BoC most recently cut this benchmark rate by 0.25% on June 5 to 4.75%, as inflation seemed to be trending downward.

That progress may have been short-lived, however, as the May inflation reading came in higher than hoped for, at 2.9%. As a result, the BoC will need all the more evidence that another rate cut is the way to go.

In an economic note following the GDP release, Doug Porter, Chief Economist and Managing Director of Economics at BMO, wrote that the April GDP report is right in line with expectations, as is the call for 0.1% in May.

“After struggling to grow at all through the last three quarters of 2023, the Canadian economy is showing a bit more of a pulse so far this year. On balance, growth is holding up a touch better than widely expected in 2024, but remains generally lacklustre,” he writes. 

“For the Bank of Canada, this doesn't change much, as growth is still a bit below potential, which likely means some further back-up in the unemployment rate and some further moderation in underlying inflation. As long as the latter holds true, more rate cuts are coming, eventually. We continue to look for the next move in September.”

The next Bank of Canada rate announcement will be on July 24, 2024.

Also read:

• Canadian CPI rises to 2.9% in May
• What does another US Federal Reserve rate hold mean for Canadians?
• Bank of Canada cuts target interest rate by 0.25% in June announcement
• The Bank of Canada’s Overnight Lending Rate: What you need to know