Flat economy suggests Bank of Canada rate hikes are working: Economists

Holly McKenzie-Sutter, BNN Bloomberg

A flat Canadian economy at the end of 2022 is a promising sign that monetary policy is working to bring down inflation, economists said Tuesday as Statistics Canada reported real gross domestic product (GDP) for last year’s fourth quarter.

StatsCan said real GDP was unchanged in the last three months of the year, following five quarters of growth.

Pedro Antunes, chief economist at the Conference Board of Canada, told BNN Bloomberg that it’s “good news” to see no growth in the numbers.

“What that’s telling us is that hopefully monetary policy will continue to have success in taming down the economic activity so that we can get the inflation numbers down,” Antunes said.

Taken with strong employment numbers from recent months, Antunes said he expects markets will respond favourable to the GDP figures.

“The fact that total economic activity is still flattish, despite that strength in employment, I think will be a successful monetary policy news story for markets.”

The numbers come nearly a year after the Bank of Canada began its tightening cycle to battle decades-high inflation, raising its central interest rate eight consecutive times to a central rate of 4.50 basis points. Last month, the Bank of Canada signalled it was prepared to pause as its monetary policy takes deeper effect in the economy.

Joe Brusuelas, chief economist for RSM, said “it’s clear the economy stalled out in the final quarter” based on the GDP report.

“It’s very clear to me that the long series of interest rate hikes are beginning to really have their effect,” Brusuelas said in a Tuesday television interview.

James Orlando, a senior economist and director at TD Economics, said Canada’s economy appears to still have momentum amid gains in disposable income.

“I think this means that even though the Bank of Canada’s probably comfortable sitting on the sidelines with this conditional pause right now. I think it’s definitely going to be watching to see if there’s going to be a resurgence in economic data in the early parts of 2023, which would lift GDP forecasts,” Orlando said in a phone interview with BNN Bloomberg.

Antunes said it takes time for rate hikes to be felt in the broader economy, with some effects already seen in areas like the cooling housing market. Recent inflation data is “headed in the right direction,” Antunes said, which will likely weigh on the central bank’s decision to pause its tightening cycle.

However, he pointed to rebounding retail activity numbers as one of the more “concerning” elements of Tuesday’s report. Retail trade grew 0.8 per cent in December from November.

“This is part of the challenge that the Bank of Canada is going to face,” he said. “Is monetary policy really having an impact at changing behavior so that consumers save rather than spend?”

Douglas Porter, chief economist at BMO, said the report should send positive signals to the Bank of Canada about the impact of rate hikes so far.

“I believe the Bank will mostly see the overall sluggish growth numbers as some confirmation that the rate hikes are working to cool growth (and ultimately inflation),” he said in an email to BNN Bloomberg. “But, of course, they will need to see more than one quarter of sluggish activity.”

Brusuelas said he would consider it “prudent” for the Bank of Canada to pause its rate hike cycle on March 8, when the next policy decision is expected.

“This is by no means baked in the cake,” he said. “We’ll see what the decision is next week.”

With files from Daniel Johnson. 

Source: BNN Bloomberg