(Bloomberg) -- The Canadian economy appeared to be running out of steam at the end of the first quarter, bolstering a case for the Bank of Canada to pivot to easier policy as early as June.

Preliminary data suggest gross domestic product was unchanged in March as gains in utilities and real estate were offset by declines in manufacturing and retail trade, Statistics Canada reported Tuesday in Ottawa.

That followed 0.2% growth in February, missing expectations for a 0.3% increase in a Bloomberg survey of economists.

Taken together with a downwardly revised 0.5% expansion in January, the industry-based GDP numbers point to an increase of 2.5% annualized in the first quarter, slightly below the central bank’s forecast of 2.8%.

The Canadian dollar tumbled after the report, trading as low as C$1.3728 per US dollar, down about 0.5% on the day. Yields on two-year Canadian government bonds rose about three basis points to 4.323% as of 8:45 a.m. Ottawa time. The report was released at the same time as hotter-than-expected data on US employment costs.

Overall, the report shows an economy that has no material risks of a sharp downturn but at the same time shows little signs of strength in domestic demand. The continued buildup of disinflationary pressures will set the stage for interest-rate cuts by Bank of Canada policymakers, who are waiting to be convinced the downward path to the 2% inflation target can be sustained.

“What is becoming clear in the recent data is that the strong growth momentum seen at the beginning of the year is unsustainable and that the economy is returning to its lackluster performance,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. 

“The return to more subdued growth solidifies our view that the Bank of Canada will cut its policy rate at the June meeting, barring any upside surprise to inflation.”

Governor Tiff Macklem and his officials held rates steady at 5% for the sixth straight meeting earlier this month. They expect the economy to strengthen early this year, supported by strong immigration and population growth. But even as growth picks up, they see inflationary pressures continuing to ease with excess supply persisting through the year.

Tuesday’s report will help the more dovish officials argue their case. At their April meeting, policymakers were split into two camps: One argued that the risk that restrictive policy would slow the economy more than necessary had diminished, while the other emphasized inflation progress and excess supply in the economy and pointed to a risk of keeping policy more restrictive than necessary.

Read More: Bank of Canada Sees Gradual Pace of Rate Cuts to Balance Risks

This is the first of two GDP reports before the next rate decision on June 5, just days after the scheduled release of the official first-quarter output figures at the end of May. The majority of economists in a Bloomberg survey expect policymakers to cut their key policy rate by 25 basis points at the June meeting, marking the start of an easing cycle.

“We always suspected that strength at the start of the year largely reflected an easing of previous supply constraints and the effects of better than normal winter weather, and that the economy could stall again thereafter,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. “Today’s data appear to support that view.”

Royce Mendes, head of macro strategies at Desjardins Securities, agreed the slowdown in growth wasn’t surprising. “January’s increase was buoyed by one-off factors,” he said in a report to investors. “As a result, we continue to see the Bank of Canada beginning a rate cutting cycle in June.”

In February, services industries led the growth for the second straight month, fueled by gains in transportation and warehousing. Goods-producing sectors were flat as mining and oil and gas extraction expanded while utilities and manufacturing contracted.

The transportation sector rose 1.4%, the largest monthly growth since January 2023, with a rebound in rail activities following a cold snap in western Canada contributing most to the increase. The public sector edged up 0.2%, while mining and oil and gas extraction grew 2.5%, the fourth time in five months.

Finance and insurance increased 0.3%, rising for a third consecutive month, led by investment services and funds. Higher-than-normal mutual fund and equity activity drove the gains amid expectations of rate cuts.

The manufacturing sector fell 0.4%, driven by declines in transportation equipment and chemical production.

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