With the economy’s resilient start to 2023, the Bank of Canada is likely to aggressively consider a rate hike next week. However, we believe that the moratorium on rate hikes that began in January will eventually be maintained, keeping the overnight rate steady at 4.5% for the foreseeable future. Advance forecasts for GDP in April have rebounded sharply after little growth in February and March (the impact of April’s massive federal workers’ strike has been contained). Growth in the first quarter was slightly stronger than expected, with consumer spending still strong this week and a strong boost in exports. So far this year, the unemployment rate has remained exceptionally low. The home resale market appears to have bottomed out sooner than previously feared, with inflation showing a surprising uptick in April.
Still, there are signs of cracks forming beneath the surface. The labor market remains buoyant, partly due to a surge in population growth that is increasing both consumer demand and the available supply of labor. Canada’s May employment numbers are expected to record a further 20,000 increase on top of a surge of about 250,000 from January to April. However, the unemployment rate is still expected to rise as the amount of “excess” labor demand continues to decline. Job openings are down about 20% from peak levels he had in March, consumer delinquency is slowly rising and employee turnover has slowed in recent months.
The BoC’s 425 basis points worth of rate hikes since March 2022, even if they take longer than previously thought, will ultimately have more widespread damage in the form of higher unemployment and lower GDP. would bring But with inflation still overheated, the central bank won’t be able to wait too long if the recent positive momentum holds up. Two more jobs figures, another inflation report and the ever-watched business outlook survey are all due to be released between the June and July policy decisions. Any further indications that rate hikes are not slowing the economy as much as expected could tip the scale towards a rate hike in July, even if the central bank chooses to stick with next week’s moratorium on rate hikes. deaf.
Data watch one week ahead
Canada’s trade surplus likely increased slightly in April. A rise in oil prices (which then reversed in May) should push exports higher than imports in April. Imports of consumer goods (soft in March, partly due to a rebound from earlier surges in pharmaceutical imports) and equipment imports will be closely monitored for signs of softening domestic demand.
Previously released preliminary estimates of the US goods trade balance showed the deficit widening from US$82.7bn in March to US$96.8bn in April due to declining exports. The US trade deficit is expected to widen further in April, with total exports falling 3.7% and imports rising 1.4%.