The GDP numbers are stronger than expected in Canada.

Canada's GDP is strong in the first quarter of 2023

Canada's latest GDP figures do not provide encouraging signs for the public who were hopeful then the interest rate cuts R on the cards. Statistics Canada reported this week that the country's economy grew add an annualized rate of 3.1% in the first quarter of 2023. This was way higher than StatsCan's forecast of 2.5% for the first quarter and higher than the Bank of Canada's latest forecast for 2.3% growth in the first quarter.

The data is not encouraging for the Bank of Canada as they are struggling to bring down inflation which is more than 2% from the ideal rate. This may trigger the central bank to renew the interest rate increase that they have paused for a couple of months.

Could this mean we may see another rate hike in June?

The gross domestic product number subdued last year until it rebounded in the opening months of this year due to strong exports and healthier consumer spending figures.

As part of the government report the momentum seems to have continued into April despite eight consecutive interest rate increases in 2022 and 2023. The household consumers are continuing to spend, businesses have continued to hire keeping the unemployment rate at the level where government is not comfortable to call it an economic slowdown.

According to the StatsCan report Canadians particularly spent more on new vehicles in the first quarter but housing investment slowed due to higher borrowing costs. The spending in the first quarter was higher for food, alcoholic and non-alcoholic beverages and travel expenditures.

Based on the numbers, it is evident that the conjunction consumption numbers are much stronger than anticipated.

Analysts expected that Canadian household will not spend much on consumption due to the fear of recession, but the data suggests otherwise. It is surprising to me that consumers have enough to spend even after the continual interest rate increases that happened in the past year, you're raising the cost of borrowing much higher.

This GDP report will heavily impact the Bank of Canada is next next interest rate decision on June 7.

It will be difficult for the Bank of Canada officials to not increase the rate when the three sets of data they based their rate hiking decisions on are against the previous decision to pause the rate hike. The probability in the market to have a rate hike in June increases from 28% to 40% after the GDP report came in this week.

Increasing Interest Rate

All the other major economies in the world are still increasing rates and that might put pressure to the Bank of Canada. However, the central bank officials have the past signal that they are still evaluating whether to increase the interest rate to control inflation. They suggested that they need more data to go back on rate hiking spree which is understandable because the economic slowdown is evident everywhere else other than the data that the government is producing.

Here we're talking about the increased GDP and a recent report from TransUnion suggested the amount of outstanding balances on credit cards in Canada is now at $2.32 trillion. This is the other side of the story which will have a much bigger impact when the bank officials sit down to decide on the interest rate hike. The massive household debt means all the consumption that is happening in the first quarter of this year could be due to the high credit conjunction. Canadians are taking on debt as they spend more on travel, dining out and buying alcohol. The report noted that credit card uses in Canada surged by 20% year over year in the fourth quarter of 2022.

What do I think?

Not sure how the Bank of Canada officials will analyze this conflicting data that suggests growing economy but backed by high debt. This could mean the central bank officials are leaning to be more hawkish in the coming months, Hmm but I still doubt they have enough firepower in terms of data to increase the interest rate again.

Posted Using LeoFinance Alpha