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Canada’s economy continues to defy expectations for a pullback.

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Statistics Canada released data on March 31 that showed the economy grew 0.5 per cent month over month in January, a remarkable reversal from December when GDP contracted 0.1 per cent. January’s reading also beat Bay Street analysts estimate for growth of 0.4 per cent.

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At the same time, Statistics Canada said preliminary data suggest the economy grew 0.3 per cent in February, indicating additional momentum. Economic activity rebounded in the vast majority of the broad industries that the agency monitors, including manufacturing, construction, and accommodation and food services.

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Economists said the monthly numbers suggest quarterly GDP — measured somewhat differently — probably grew at an annual rate of around 2.5 per cent, well above the Bank of Canada’s forecast of 0.5 per cent.

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While the report showed an economy healthier than many expected, economists now think the GDP surprise could make the Bank of Canada‘s job tougher as it seeks to cool inflation by raising interest rates to tamp down demand.

Here’s what some of them are saying about the GDP numbers and what it means for the Bank of Canada and interest rates.

Charles St-Arnaud, Alberta Central

“Today’s release of the monthly GDP suggests that the Canadian economy started the year strong. As such, the strength in January and February is pointing to growth in the first quarter of 2023 at around three per cent quarter over quarter annual rate, far from a contraction. This follows a period of weakness in the last quarter of 2022, as higher interest rates took a toll on rate-sensitive sectors.

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“The resilience of the Canadian economy is likely to complicate the Bank of Canada’s job of bringing inflation back to its target. The Bank of Canada signalled at its latest meeting that it would keep its policy rate unchanged for some time to better assess the impact of previous rate hikes on the economy and inflation. However, with growth likely close to three per cent, excess demand in the economy is growing, adding to inflationary pressures and raising the likelihood that further rate hikes will be necessary. Similarly, the tight labour market is supporting strong wage growth. However, the banking woes in the U.S. and Europe suggest caution is warranted.

“The Bank of Canada is likely at a crucial juncture and facing a significant dilemma. The central bank may have to choose between fighting inflation and hiking interest rates again or focusing on financial stability and keeping rates on hold.”

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Stephen Brown, Capital Economics

“The strength of GDP growth in January, and probably February too, suggests the Bank of Canada will use its April meeting to reiterate that, despite the recent banking turmoil, it is still prepared to raise interest rates again if needed.

“The big surprise is that, despite the early estimates showing falls in manufacturing, wholesale and retail sales in February, the preliminary estimate points to another 0.3 per cent month-over-month gain in GDP last month. That gain implies the economy is heading for growth of about 2.5 per cent annualized this quarter, slightly higher than the two per cent gain we have pencilled in.

“A 2.5 per cent expansion would also be stronger than the bank’s forecast of a 0.5 per cent rise, but recall that the stagnation in GDP last quarter was weaker than the bank’s estimate of a 1.3 per cent gain. Moreover, we know that the rebound in activity is helping to lower prices rather than contributing to inflationary pressures. For example, the CPI passenger vehicle price index fell by 2.5 per cent over the first two months of the year. So while the bank will stick to its hawkish messaging, we doubt recent developments will cause it resume rate hikes.”

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Douglas Porter, BMO Economics

“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views. Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cool-down in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to one per cent. Suffice it to say that if the strength seen in the opening months of the year persists, the Bank of Canada is going to find itself in a tough spot.”

Randall Barlett, Desjardins Economics

“Today’s outsized move in January real GDP and continued momentum through February leaves little room to equivocate. The Canadian economy started the year on a very strong footing. We are now tracking real GDP growth approaching three per cent annualized in Q1, well above the bank’s 0.5 per cent tracking in the January 2023 monetary policy report.

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“As such, expect substantial upward revisions to the central bank’s near‑term forecast when it’s published in a week and a half. But with the recent global banking sector volatility and inflation coming in below expectations in February, there are plenty of good reasons for the bank to stay on the sidelines for the foreseeable future. However, the data suggest the central bank should reiterate its hawkish‑leaning forward guidance.”

Tony Stillo, Oxford Economics

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“After stalling in Q4 2022, it now looks like GDP will grow modestly in Q1. Still, we believe a contraction in the economy will be unavoidable this spring and summer as the full impact from higher interest rates materializes, lenders tighten credit due to ongoing financial turmoil, and the U.S. slips into recession.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada Economics

“Despite the continued rebound of the Canadian economy in Q1 after a sluggish quarter, we still believe that the Bank of Canada should maintain its pause in monetary tightening. The rate hikes have been very aggressive and will continue to weigh on the economy given the lag in their pass-through.

“In addition, the outcome of the ongoing turmoil in the global banking sector and its impact on credit conditions in the coming months remains uncertain. We expect to see ups and downs in output in later quarters that will leave GDP essentially flat over the next year. This is an argument for patience. All the more so given the encouraging developments in inflation that are now emerging.”

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Jay Zhao-Murray, currency market analyst, Monex Canada

“While the Bank of Canada is currently on a conditional pause as it awaits more data, the strength in the real economy, as measured by upward revisions from last month’s preliminary figure (for GDP) and another probable above-potential reading in February, could tilt the central bank in a more hawkish direction.

“While it is still too early to call for another rate hike, the odds are shifting in that direction: BoC officials stated they are mostly worried about upside risks to inflation and have shown little panic about recent global banking troubles. Stronger growth means the costs to another hike are falling, and it also puts upward pressure on inflation. Markets largely agree with our assessment, as they are now pricing only 35 basis points of rate cuts by year end, the fewest in nearly three weeks, and a far cry from the 90 basis points of cuts priced just a week ago.”

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