Canada: GDP growth heats up in Q1 as consumer spending soars
May 31, 2017
The economy picked up steam in Q1 as substantial growth in consumer spending more than outpaced a slip in exports, growing at a seasonally adjusted annualized rate (SAAR) of 3.7%. Q1’s GDP result came in slightly ahead of FocusEconomics Consensus Forecast panelists’ expectations of 3.4% growth, and handily beat Q4’s weak 2.7% expansion. The first quarter print, published by Statistics Canada, calmed nerves following a tepid Q4 and confirmed the economy’s successful adjustment to lower oil prices.
The breakout stars of Q1’s GDP report were Canadian consumers, whose appetites for spending—at the expense of soaring consumer debt levels—helped domestic demand to accelerate 4.7% in the quarter (Q4: +0.1% SAAR). Private consumption climbed 4.3% (Q4: +3.0% SAAR) and drove the domestic economy, while fixed investment also rebounded solidly (Q1: +10.0% SAAR; Q4: -7.8% SAAR) from a quarter earlier. After slipping by nearly a quarter in Q4, long-elusive business non-residential investment roared back to 10.3% growth in Q1 following declines in eight of the nine previous quarters. Q1’s result hinted that a potential turnaround in business investment could finally be underway after nearly three years of cutbacks. Government consumption, for its part, decelerated to 0.5% (Q4: +1.3% SAAR). Inventories accumulated at their fastest pace in two years, climbing by CAD 12.3 billion (USD 9.2 billion).
On the external side, exports surprised to the downside by slipping 0.3% in Q1 (Q4: +0.8% SAAR) as demand from abroad for Canadian services waned. That said, shipments of goods were broadly unchanged as an increase in motor vehicle sales offset declining shipments of minerals and metal ores. On the other hand, imports rebounded from an 11.3% decline in Q4 to a 13.7% increase in Q1. Consequently, the external sector’s contribution to growth was minus 4.8 percentage points (Q4: plus 3.9 percentage points), marking the sector’s most significant drag on headline growth in nearly a year.
Q1’s strong GDP print once again shined a light on consumer spending and the sky-high levels of household debt that Canadians continue to amass in the process. Canada’s household savings rate dipped to 4.3% in Q1 as wage growth was outstripped by growth in household expenditures, and the debt service ratio inched up as debt payments rose faster than disposable income. Canadian consumer debt levels currently stand as one of the highest among OECD member countries, and could eventually threaten medium-term growth prospects if asset values—especially increasingly unaffordable housing in the major metropolitan areas—were to ever experience a correction.
Author: Christopher Thomas, Economist