Canada's GDP grew less than expected. Will a rate cut follow?

Spending by Canadian households helped the economy growat an annualized rate of 1.7 per cent in the first three months ofthe year, Statistics Canada said Friday.

Economists say that expansion was less thanexpected, as estimates had called for a better than two per cent increase, but weaker growth than forecast increases the odds of an interest rate cut by the Bank of Canada next month.

Household spending on services rose 1.1 per cent, boosted by spending on telecommunications services, rent and air travel, whilehousehold spending on goods gained 0.3 per cent, helped higher by spending on new trucks, vans and sportutility vehicles.

The results for the first quarter came as Statistics Canada saidreal gross domestic product was essentially unchanged in March,following growth of 0.2 per cent in February.

Douglas Porter, chief economist at the Bank Of Montreal, said in a note the country's economy "cooled notably in the early spring after a decent start to the year," referring to January's performance, which surpassed predictions and was a 12-month high.

Katherine Judge, director and senior economist of CIBC Capital Markets, said in a note that while the economy improved, "we're not yet basking in the sun," citing concern that March showed essentially no economic growth, after a boost in spending at the start of the year.

Friday's reading of the economy comes ahead of the Bank of Canada'sinterest rate decision set for next week.

Rate cut hangs in balance

Bank of Canada governor Tiff Macklem has said a rate cut iswithin the realm of possibilities, but that the decision will be driven by the economic data.

He has said the central bank is seeing the right conditions tobegin lowering its policy rate from five per cent, but that he wantsto see those conditions sustained to ensure inflation is headingdown to the bank's two per cent target.

The annual inflation rate fell to 2.7 per cent in April comparedwith 2.9 per cent in March.

The March GDP figure came as the construction industry gained 1.1 percent for the month, its strongest growth rate since January 2022. Meanwhile, the manufacturing sector fell 0.8 per cent, weighed downby retooling work at multiple automotive assembly plants in Ontario.

The agency said its preliminary estimate for the economy in Aprilpoints to growth of 0.3 per cent as increases in manufacturing,mining, quarrying, and oil and gas extraction and wholesale trade were partially offset by decreases in utilities.

Statistics Canada also revised its reading for growth in the fourthquarter of 2023 down to an annualized rate of 0.1 per cent, comparedwith its initial report of an annualized rate of one per cent.

Parsing the numbers, Judge at CIBC said that"the Bank of Canada remains on track to deliver the first interest rate cut at next week's meeting."

Porter said the data modestly increases the chances of a rate cut next week, and while there are "respectable arguments" on both sides of the decision, "we've been calling for a June cut since late last year, and will stand by that call."

For its part,RBC said in a note that it sees little reason for the Bank of Canada to wait on easing rates and is looking for a 25 basis point cut to the overnight rate next week.

On the other hand, TD Bank senior economist James Orlando noted that the centralbank has prided itself on communicating its intentions to makechanges to monetary policy ahead of an actual move.

"If it wants to keep up this effort of transparency and forwardguidance, we expect the BoC will hold rates steady next week and usethe meeting to tee-up a rate cut in July," Orlando wrote in areport.

"That said, expect fireworks as the BoC could go either way withthis one."