By Promit Mukherjee and Ismail Shakil
OTTAWA (Reuters) -Canada's economy grew more than expected in November and likely avoided a technical recession in the second half of last year, data showed on Wednesday, as the central bank mulls when to start reducing 22-year high interest rates.
Gross domestic product expanded 0.2% in November from the previous month, Statistics Canada said, faster than a 0.1% forecast by analysts polled by Reuters. Growth rebounded slightly after stalling for three straight months.
The economy also likely expanded by 0.3% in December, which would mean annualized growth of 1.2% in the fourth quarter, according to a preliminary estimate. In the third quarter, Canada's GDP contracted by 1.1%.
So the economy likely avoided a technical recession - defined as two consecutive quarters of contraction - in the second half of last year.
The Canadian dollar was trading nearly unchanged at 1.34 per U.S. dollar, or 74.63 U.S. cents, after clawing back an earlier decline.
The Bank of Canada (BoC) trimmed its growth forecasts for 2023 and 2024 last week. For the fourth quarter ended in December, the central bank had projected zero growth compared to an earlier forecast for a 0.8% gain.
The November growth and December's flash estimate show that the central bank's efforts to bring down inflation to its 2% target have not dragged the economy into recession, at least not yet. BoC Governor Tiff Macklem has said he does not expect the economy to dip into recession.
The central bank has kept its overnight rate unchanged at 5% for the last five months, but the bank is beginning to shift its focus to when borrowing costs could be lowered rather than whether to hike again.
"Even if the rebound in Q4 is confirmed, it is clear that it has been driven by an easing of some previous supply constraints rather than necessarily an improvement in domestic demand," said Andrew Grantham, an economist at CIBC (TSX:CM) Capital Markets.
"We still suspect that upcoming employment and CPI releases will be most important in determining when the Bank of Canada may start to cut interest rates," he added.
Money markets pared bets for an April rate cut to a 42% chance from a 51% chance before the growth figures.
The rate hikes have helped to bring down inflation from a four-decade high of 8.1% in June 2022 to 3.4% in December, but a return to the bank's 2% target is not expected until 2025. The Bank of Canada's next rate announcement is in March.
The growth in November was led by goods-producing industries such as agriculture, mining, and construction. These industries saw the highest growth rate since January 2023, Statscan said.
Canada's goods-producing sector expanded 0.6% on a monthly basis in November, while the service-producing sector grew by 0.1%, the data showed.