By Robb M. Stewart


OTTAWA--Canada's economy lost momentum after a strong start to the year and is tracking below the central bank's latest forecast, supporting expectations a first cut to interest rates could come before summer.

Preliminary data suggest gross domestic product, a broad measure of goods and services produced across the economy, was essentially unchanged in March, Statistics Canada said Tuesday.

That follows 0.2% growth in February GDP from the month before to 2.218 trillion Canadian dollars, the equivalent of $1.624 trillion. That was softer than the data agency's advance estimate a month ago of 0.4% growth and follows a downwardly revised 0.5% expansion in January. Compared with a year earlier, GDP in February increased 0.8%.

If March's estimate stands when official numbers are released late next month, Canada managed industry-level growth of 2.5% annualized in the first quarter following growth in the prior quarter of 0.6% or a slightly stronger 1% when consumption figures not included in monthly GDP data is included. The Bank of Canada has forecast the economy will continue to strengthen this year after stalling in the second half of 2023, and has projected total annualized growth for the latest quarter of about 2.8%.

With growth in Canada waning after January's jump, most economists don't anticipate a rebound in the second quarter of the year that could derail the central bank from pivoting to rate cuts as soon as its next policy meeting in early June, provided inflation continues to cool. The growth Canada has seen in recent months has been bolstered by a booming population and recovery in consumer spending, but has come alongside an increasingly softer labor market and steady rise in unemployment.

Economists were expecting monthly GDP growth of 0.3% in February and a slowdown last month, in part given the one-off factors that buoyed growth in January, including weather and the end to a strike by public-sector workers in Quebec that ended in December.

"The January surge in output was temporary, and in no way marked an inflection point for the growth backdrop in Canada that remains very weak," said Royal Bank of Canada's Claire Fan, who is among economist who assumes rates will be cut in June.

The Bank of Canada has held its benchmark interest rate steady at each of its last six meetings since last raising it last July to a more than two-decade high of 5%.

The latest data again highlights what economists expect will be a policy divergence between the Bank of Canada and Federal Reserve. The U.S. economy has shifted down a notch even as core inflation has accelerated in the first quarter, though the slowdown in headline GDP growth to 1.6% still shows an economy outpacing that of its northerly neighbor. During a public discussion in Washington this month, Fed Chairman Jerome Powell suggested it could take longer than expected to have the confidence to move to cutting rates after stronger-than-expected inflation, while at the same event Bank of Canada Gov. Tiff Macklem said that while Canadian policymakers were still looking for signs core inflation is sustainably headed back to target they don't need to follow the same path as the Fed.

"While the first quarter looks like it was decent overall, the loss of momentum as the quarter progressed is the bigger takeaway," Benjamin Reitzes, managing director of Canadian rates and macro strategist for fixed income at Bank of Montreal, said. "That puts additional pressure on the BoC to begin cutting as soon as June."

Statistics Canada's advance information for March indicates increases in utilities and real estate, rental and leasing were offset by declines in manufacturing and retail trade.

The month before, growth was driven by services-producing industries. Goods-producing industries were broadly flat for the month, except for natural resources extraction, which rebounded from weakness in January to expand for a fourth time in five months.

The agency said transportation and warehousing showed its largest monthly growth since January 2023, buoyed by a recovery in rail transportation as activity returned to normal following January's cold snap in Western Canada. Air transportation was also up strongly, with the strongest growth rate since May 2022.

Canada's public sector grew modestly following a sharp increase to start the year with a recovery in educational services following the end of a public-sector workers strike in Quebec. Finance and insurance activity was up for a third consecutive month, driven by financial investment services, funds and other financial vehicles, Statistics Canada said.

Mining, quarrying and oil and gas extraction grew 2.5% in February, following a 2.3% decline the month before. Oil and gas output expanded to partially offset a contraction in January when extreme cold across Canada's Prairies affected production, while mining more than recovered from January's decline.

Manufacturing in Canada declined for the month, thanks in part to a fall in motor vehicle and parts as shutdowns for retooling at some plants continued to dent production.

There will be one further GDP report, as well as inflation and employment data, before the Bank of Canada's coming policy meeting. If growth remains sluggish to start the second quarter and inflation doesn't heat up again, the bank should start gradually reducing interest rates, Andrew Grantham, senior economist at CIBC Capital Markets, said.


Write to Robb M. Stewart at robb.stewart@wsj.com


(END) Dow Jones Newswires

04-30-24 1112ET