(Bloomberg) -- The Canadian economy bounced back at the end of last year with the help of strong oil exports, giving the Bank of Canada more time to assess inflation progress before cutting rates. 

Preliminary data suggest gross domestic product expanded 0.4% in January, the strongest monthly pace in a year, due to a resumption of activity after public sector strikes in Quebec ended, Statistics Canada reported Thursday in Ottawa.

That followed a flat reading in the previous month, missing expectations for a 0.2% increase in a Bloomberg survey of economists.

Overall, the economy is the fourth quarter grew at a 1% annualized pace, faster than a consensus estimate of 0.8% and the Bank of Canada’s forecast of zero growth. That’s a rebound from an upwardly revised 0.5% contraction between July and September.

Though the fourth-quarter rebound was stronger than expected, the underlying details of the report suggest an economy that continues to stall. Household consumption edged up, but three-quarters of the increase was caused by higher spending on vehicles as supply chain issues ease and back orders were fulfilled.

Population growth is also still outpacing the rise in household spending, with per-capita consumption expenditures falling for the third straight quarter. Declines in business and housing investments were some of the biggest drags — outside of the pandemic, the second half of 2023 represented the weakest half-year for business investment since 2016.

Still, the data indicates Canada is avoiding a sharp downturn, and there’s little evidence to spur the Bank of Canada into quickly considering monetary easing. Higher exports — which were driven by crude oil — as well as reduced imports fueled Canada’s economic growth in the fourth quarter.

While policymakers have shifted their discussions to how long rates need to remain restrictive, they’re still waiting for more data to confirm sustained downward momentum in underlying inflation.

“There’s nothing here that drives increased urgency to cut rates, though ongoing below potential growth will drive more disinflationary pressure,” Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, said in an email. “It’s still all about inflation.”

What Bloomberg Economics Says...

“As expected, Canada has, thus far, avoided the technical recession that has befallen some of its Group-of-Eight peers. As such, the Bank of Canada has some space to keep policy rates restrictive in the near term.

The details of the report paint a somewhat bleaker picture. Monetary policy is gaining traction in the real economy, as illustrated by declining fixed investment. And the primary source of 4Q GDP growth was an improved trade balance — due in large part to declining imports of goods as consumers tighten their belts.”

— Stuart Paul, US and Canada Economist  

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This is the last key economic data before the Bank of Canada’s next rate decision on March 6. Since its January meeting, economic releases have been mixed, with jobs gains beating forecasts while core inflation eased more than expected and a preliminary retail sales estimate suggested a sharp pullback in spending. Economists widely expect the bank to hold policy rates steady at 5% again for a fifth straight meeting next week.

The report details suggest domestic demand remains weak, Andrew Grantham, an economist with the Canadian Imperial Bank of Commerce, wrote in a report to investors. 

“Growth appears to have been driven largely by an easing of previous supply constraints helping exports and car sales, rather than necessarily an improvement in domestic demand,” he said. “Because of that, and given that inflation is actually running below the bank’s January monetary policy report projections, today’s data doesn’t change our forecast for a first interest rate cut in June.”

There is reason to expect the bank will wait until at least June to start cutting interest rates, Stephen Brown of Capital Economics wrote in a report to investors. 

“Providing the latest preliminary estimate is not also revised down heavily, that means the economy should probably eke out another modest expansion this quarter and reduces the chance of the Bank beginning to cut interest rates as soon as April.”

The loonie has strengthened by about 0.3% against the US dollar since the time of the release. Canadian government bond yields are lower on the day.

Bank of Canada policymakers are also closely watching the Federal Reserve. In the US on Thursday, the Fed’s preferred gauge of underlying inflation rose in January at the fastest pace in nearly a year. 

--With assistance from Erik Hertzberg and Jay Zhao-Murray.

(Updates market reaction.)

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