Treasury
Canada's Economy "Remained Ice Cold" Early 2026, But Central Bank May Hesitate To Put Cuts Back on the Table, says Desjardins
Canada's economy "remained ice cold" throughout the early days of 2026, says Royce Mendes over at Desjardins, but even though the early economic results for 2026 "aren't encouraging" the Bank of Canada may be hesitant to put cuts back on the table, he adds.Mendes noted Friday's economic data showed quarterly GDP declined 0.1% in Q1, in sharp contrast to expectations for 1.5% growth. Falling investment rates across the economy provided a "stiff headwind", he said, noting residential investment was down another 8% annualized in Q1, while non-residential business capital spending declined 3%. Government investment also fell, reversing some of the defense-driven surge seen in the second half of 2025.Household spending continued to grow, posting an increase of 1.5%, Mendes noted, but he also noted with weakness across the labour market in Q1, the household savings rate declined to 3.5% to support that spending. The Q1 savings rate is the lowest rate seen since early 2024. Final domestic demand, a better gauge of the underlying momentum in the economy, declined 0.4% in Q1.Mendes noted imports surged 12%, but much of that was driven by sharply higher gold purchases. Excluding categories that include gold, imports were up roughly 5%. Exports continued to be hindered by tariffs, edging down 0.5% on declines in the auto sector. "Exports face severe downside risk this summer, with the CUSMA review set to heat up," Mendes added.The economy, Mendes noted, has looked "volatile" on a monthly basis. After rising in February, GDP posted a slight decline of 0.1% in March. Despite the spike in oil prices, oil and gas extraction fell in March as a result of longer than anticipated maintenance and repairs at some upgrading facilities as well as harsh weather across the Prairies. But, Mendes also noted, Statistics Canada's advance estimate for April points to a "big bounce back", with GDP apparently having risen 0.4%. As a result, the Desjardins early tracking for Q2 GDP points to a rebound of 1.5 to 2.0% annualized growth.Mendes noted a second consecutive quarterly contraction in Canada's population meant that per capita GDP was up almost 1% annualized, and recent communications from the central bank have highlighted the need to separate the structural slowdown in economic activity due to lower potential growth from any cyclical weakness. The fact that per capita GDP actually rose will limit the central bank's ability to respond to the slowdown, Mendes said, but added: "markets are correctly, in our opinion, pricing out the likelihood of rate hikes on the news of weaker than expect GDP numbers."
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