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The slowdown is setting in


MONTREAL, Canada – Growth continued in Canada in February, but the momentum the economy has been enjoying in recent months finally seems to be fading. At least that’s what Statistics Canada’s first estimates for March suggest. Signs of a slowdown are multiplying, which will probably reinforce the Bank of Canada’s preference to keep its policy rate where it is when it makes its next announcement in June.

First quarter beats expectations

Monthly GDP growth continued in February with a gain (+0.1% from January), which was below preliminary expectations announced by Statistics Canada. Despite an expected contraction of GDP by 0.1 percent in March, economic activity was still expected to perform well in the first quarter, coming in at an annualized rate of 2.5 percent, compared to the last quarter of 2022.

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Uneven growth in February

While below expectations, the Canadian economy still performed well in February, although growth was less widespread than in January. Almost half of the 20 or so sectors surveyed slowed during the month. Sectors closely tied to household consumption, including retail and wholesale trade, contracted during the month. This poor performance is not surprising considering that both industries recorded losses in sales volume. The manufacturing sector also lost momentum.

On the positive side, the construction sector appears to have begun to take off again in 2023. After having been a drag on Canadian GDP growth in the second half of 2022, the residential construction industry appears to have experienced positive growth in the first two months of the year. This surge is likely due to the strength of Canada’s population growth and the interest rate pause announced by the Bank of Canada.

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The employment boom is not totally over

Although still present in some industries, labour shortages are becoming less of a drag on the economy. Approximately 41,000 new jobs were created in April. However, this month, all of the increase was part-time. The involuntary part-time rate fell to 6.4 percent – the lowest level in 2023.

With an economic slowdown taking hold, job gains will be increasingly rare in the coming months and may be replaced by employment losses. The unemployment rate may rise slightly in the second half of the year as job vacancies decline rapidly and immigration intake continues at a high level.

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Stubborn core inflation could force a rate increase

The economic news remained broadly supportive of the Bank of Canada’s pause in its tightening cycle. However, economic activity in the first quarter was probably still above what the central bank would have liked to see and the labour market still too tight. It would appear that several members of the bank’s Board of Governors feel core inflation is too high to completely rule out a further interest rate increase.

Nevertheless, inflation as measured by the annual change in consumer prices continues to be on a downward trend and at a good pace. CPI growth fell from 5.2 percent in February 2023 to 4.3 percent in March and the three-month change remains encouraging. The trend is expected to continue this spring with favourable comparisons to last year when commodity prices exploded following Russia’s invasion of Ukraine.

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However, the core consumer price index that excludes more volatile factors such as energy and food has been slower to correct.

Monetary policy continues to slow price growth, but the fight against inflation is not over. The policy rate should remain at 4.5 percent for the rest of the year unless there is a major turnaround in the economy.

Impact on your business

  • The Canadian economy remains strong but is finally showing signs of slowing down. Prepare your business accordingly as you may be busier this summer than last year, especially if you’re in a consumer goods industry. Make sure you manage your inventory and keep a close eye on your balance sheet.
  • The strong performance of the economy is likely causing the Bank of Canada to question the pause in its tightening cycle. While a hike remains a possibility, we expect rates to remain steady for the year as a whole. If you have investment plans, it is unlikely rates will change anytime soon.
  • Pressure on the labour market is easing across the country. As vacancies continue to decline and the labour force increases, the pool of potential candidates is growing and the competition for workers is decreasing. Now is a good time to take advantage of this easing if you’ve been putting off hiring for your long-term needs.


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