Canada’s largest bank is starting to think the economy is doing much better than previously thought. RBC wrote to investors this afternoon, outlining its expectations for the central bank’s next rate announcement. The bank’s economists expect GDP data to be more robust than previously anticipated after strong inflation data. As a result, the Bank of Canada (BoC) is seen hitting pause on rate cuts as long as tariff talks don’t derail investor sentiment.
“Canadian gross domestic product will be in focus after firmer labour market reports in December and January, and an upside headline inflation surprise increased the odds that the Bank of Canada will forego another rate cut in March,” explained RBC assistant chief economist Nathan Janzen.
All eyes are on the indicator released at the end of this week. RBC economists see real GDP quarterly growth at 1.5% for Q4 2024, primarily due to household strength. They anticipate consumer spending will come in at 3% for Q4, the biggest jump since Q3 2021—and rates are considerably higher. Residential investment is also expected to be a solid contributor, as home sales continue to recover.
The bank does anticipate some weak spots. Janzen warns of negative business investment plans in 2025, especially amongst business and machinery investment, critical for productivity improvements. He also notes that labor markets have improved, hours worked declined by 0.2% in Q4—the first drop of 2024.
Structurally, that thesis presents some issues. Most growth is related to credit consumption, fueled by future productivity. At the same time, investments in productive business gains are being avoided by businesses. That’s tomorrow’s problem though, with the bank focused on the expected near-term growth.
“We expect the signs of life in the household sector and upside inflation surprises in recent months will be enough for the BoC to stand pat on interest rates in March for the first time since June 2024,” explained Janzen.
The recent acceleration of inflation is perceived as a negative, but it serves as a sign of consumer strength. Consumer demand is strong enough to firm an oversupply, indicating economic threats haven’t deterred them. The recent GST/HST holiday also artificially suppressed some CPI data points, meaning households are consuming even faster than the headline data implies.
Last month the BoC justified its cut largely as a prophylactic for tariff threats. It looks a little excessive in the face of recent CPI data, but that doesn’t mean households are entirely in the clear from tariffs.
“The potential for significant tariff hikes remain a downside risk to economic growth and the interest rate outlook, but absent a trade shock, economic data is suggesting Canada’s economy may be faring better than initially feared,” explained Janzen.