Scotiabank analysis suggests BoC may need to revise forecasts
The Bank of Canada may need to revise its inflation forecasts upward following significant GDP revisions that suggest less economic slack than previously estimated, according to a Scotiabank Economics analysis released last week.
Statistics Canada’s upward revisions to GDP data for 2022, 2023, and 2024 could shift the central bank’s estimated output gap from negative 1.1% as of the second quarter of 2025 to potentially positive 0.55%, representing excess demand rather than slack, Scotiabank vice-president and head of capital markets economics Derek Holt wrote in the analysis.
“The BoC could go somewhere in the middle with a revised slack estimate of somewhere around +¼% which is still a big swing,” Holt wrote. “At a minimum, they could cut in half the amount of estimated slack compared to previously.”
Annual GDP growth over the three years was revised upward by approximately 0.5% each year, with the level of GDP revised up by a cumulative 1.7 percentage points by the end of 2024. Statistics Canada did not prominently feature the revisions in its main daily releases, instead placing the information in a provincial GDP report, Hold noted.
The revisions included upward adjustments to both consumer spending, which adds to demand, and investment, which adds to productive capacity. According to Holt, this means the Bank of Canada will likely revise its estimates of both actual GDP and potential GDP when it publishes its next Monetary Policy Report at the end of January.
“Wiping out at least a material amount of slack means that we’re left with a possible explanation of sticky underlying inflation and continued upside pressure in light of other drivers like cost pressures,” Holt wrote.
Caution urged in interpreting the figures
Canada’s third-quarter GDP grew 2.6% on a seasonally adjusted annualized basis, significantly exceeding the consensus forecast of 0.5%. However, Scotiabank cautioned against reading too much into the headline figure, noting that the main driver was reduced import leakage rather than underlying economic strength.
Final domestic demand, which combines consumption, investment, and government spending, was essentially flat at negative 0.08% quarter-over-quarter on a seasonally adjusted annualized basis.
September GDP rose 0.2% month-over-month on a seasonally adjusted basis, matching expectations, while Statistics Canada’s preliminary estimate showed October GDP falling 0.3%. Scotiabank suggested some of October’s weakness should be discounted due to strikes by Alberta teachers and postal workers, noting that many of the teachers involved were also working parents.
The GDP revisions also provided a modest boost to per capita income estimates, though Scotiabank noted these figures remain poor overall. The analysis suggested per capita numbers could begin improving as population growth slows with tighter immigration policy.
Canadian bond yields moved higher and the dollar appreciated following the GDP release.
