The Canadian economy didn’t grow or shrink in April, missing economist expectations for a 0.2% gain.
Despite the softness, the upshot was that March’s flat reading was revised up a tenth, while StatsCan’s flash estimate suggested that momentum picked up considerably in May, with a 0.4% print pencilled in. Furthermore, the data release noted that the public sector as a whole contracted by -0.3%, led lower by a large -1.0% decline in public administration due to the federal government workers’ strike. Given that the flat reading was driven by a temporary issue, March’s data was revised upwards, and the flash estimate points to considerable strength, we think the Bank of Canada is likely to look through April’s weaker print. Nevertheless, the miss relative to expectations does marginally increase the risk of inaction, a view shared by money markets as they reduced the expected odds of a hike by about 5 percentage points but, on balance, still believe a hike is more likely than not.
We also continue to expect a hike in July, with the remaining risk being contingent on the BoC’s quarterly surveys released later today and June’s jobs report next week.
In addition to those reasons, the growth breakdown by industry supports the idea that the BoC will likely look through the data. Aside from public administration, the only other industries to post notable declines were manufacturing (-0.9%) and wholesale trade (-2.0%), and StatsCan reported that a rebound in these very industries will drive next month’s expected strength. The temporary nature of the economy’s mild slowdown gives little reason for policymakers to dramatically temper their views. However, a statistical counter argument can be made to this assumption as the first month of each quarter tends to have the largest impact on quarterly growth rates due to compounding effects. In the event that April’s data is unrevised, this dynamic would limit how much the BoC will upgrade their view of economic growth for 2023.
Mixed performance across industries as just over half post increases
Zooming out, there weren’t many other obvious signals in the data. Just over half of Canadian industries (11 of 20) grew in April, and the split didn’t fall along goods vs. services.
Goods producing industries edged up by 0.1%, as the manufacturing decline was offset by a robust increase in mining and oil and gas extraction (+1.2%). Over in the services sector, the largest sector of the Canadian economy, real estate rental and leasing activity posted a 0.5% expansion, the industry’s sixth straight month of growth. With the gains in real estate offsetting the public sector contraction, the services sector as a whole was unchanged in the aggregate. Outside of the industries already discussed, the contributions to aggregate growth were small, indicating no real change to economic activity despite larger percentage changes in those industries, owing to their smaller size.
Following the data release, the Canadian dollar briefly weakened against the US dollar before rallying again, leaving the currency slightly stronger than where it began.
This was probably driven by a broader sell-off in USD, however, sparked by US data that were released at the exact same time as the Canada GDP report. Along with the pricing out of upside interest rate risk in the money markets, Canadian yields also gave up their gains as demand for CGBs rose. Canadian 2s and 10s are now down about 4 basis points on the day, while the US-Canada 2y yield spread widened slightly to 23bps in favour of the US.
Jay Zhao-Murray, FX Market Analyst