Economists believe Canada’s latest economic data will persuade the Bank of Canada to make its first rate cut of this tightening cycle in June, marking a significant divergence from the U.S. Federal Reserve.
On Tuesday, Statistics Canada revealed preliminary data showing Canada’s economy flatlined in March, while it grew 0.2 per cent in February, down from previous predictions of 0.3 per cent growth.
“Well, there's no way around it, that was a disappointing number,” Dylan Smith, senior economist at Rosenberg Research, told BNN Bloomberg in a Tuesday television interview.
“Not only did we see a revision to January, which was coming into the year looking quite strong, we've missed consensus in February and it looks like we're flatlining in March. All that points to growth under one per cent for the quarter analyzed, I would think, which is well below the Bank of Canada's expectations.”
Tu Nguyen, an economist with RSM Canada, said the data shows “little steam left in the Canadian economy,” and added that a rate cut is imminent, even if the Fed holds for longer.
“It is undeniable that the growth gap between the stagnating Canadian economy and a resilient U.S. economy has widened,” she wrote in a news release. “This will lead to a divergence in the policy paths of the two central banks, with the Bank of Canada cutting in June and the Fed waiting until September.”
“There is little reason for the Bank of Canada to keep the rate at five per cent any longer, as doing so would only bolster the probability of a recession.”
Geoff Phipps, trading strategist and portfolio manager at Picton Mahoney Asset Management, agrees that divergence between the Bank of Canada and the Fed is on the way.
“Our view is that policy divergence is closer than it has been this cycle; lower expected growth in Canada and a more rate-sensitive economy is likely to force (Bank of Canada) policy to diverge with The Fed in a meaningful way over the next few quarters,” he said in a news release.
Smith said the Bank of Canada has diverged from the Fed several times in the last 30 years and each time it was because the economic conditions in Canada called for it.
“What you're seeing play out right now… is a sharp weakening of the loonie and domestic equities, looking a lot more attractive on a relative basis than U.S. equities and, of course, our performance in the bond market as well,” he said.
How far the bank diverges is yet to be seen, Smith added, as it will likely depend on the economic reaction to the first cut.
“I think once that initial cut happens, there'll have to be a point where we look at what happens to relative financial conditions,” he said.
“Based on where inflation is going in the Fed and where the Fed's bar is for cutting, it's quite possible that we could see two or three cuts before one comes in the Fed.”
With files from Bloomberg News