06:56 AM EST, 02/24/2025 (MT Newswires) -- Canadian gross domestic product will be in focus this week after firmer labor 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, said RBC.

Canada will release December and Q4 GDP results on Friday.

The bank's expectation is for real GDP to rise 1.5% on an annualized quarter-over-quarter basis in Q4. Household spending has been showing signs of life in the wake of earlier interest rate cuts.

RBC predicts consumer spending rose 3% in Q4 on the largest retail sale volumes increase since Q3 2021. Residential investment likely posted a second consecutive quarterly increase driven by higher building activity and a surge in home resales. But, business spending has remained significantly softer-imports of machinery and equipment fell again in Q4, and an uncertain global trade backdrop will continue to weigh on business investment plans in 2025.

Labor markets have firmed in recent months, but actual hours worked declined by 0.2% in Q4 -- the first quarterly drop in a year.

Growth momentum on a monthly basis appears to have faded later in the quarter, stated the bank. For December, it sees GDP edged up 0.1% month over month, below Statistics Canada's flash estimate a month ago of 0.2% growth and only partially retracing a 0.2% decline in November. Retail sales were robust in the December holiday shopping period -- Canada's tax holiday likely boosted a significant amount of goods consumption.

However, accommodation and food services spending pulled back and December manufacturing sales came in substantially softer than preliminary estimates with details pointing to a contraction in output in the sector. Work stoppages in the transportation sector at ports and Canada Post in November and December will continue to distort the data, but StatsCan's preliminary GDP estimate pointed on net to another decline in transportation and warehousing.

RBC forecasts 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.

The potential for significant United States tariff hikes remains a downside risk to economic growth and the interest rate outlook, but absent a trade shock, economic data suggests Canada's economy may be faring better than initially feared, added the bank.