Canada: GDP growth moderates in Q1; fundamentals remain solid
May 30, 2018
Canada’s economy began the year at a slightly slower pace, with seasonally-adjusted annualized (SAAR) growth coming in at 1.3% from a quarter earlier in the first quarter. This was down from the 1.7% SAAR expansion in the fourth quarter last year, roughly matching the Bank of Canada’s growth forecasts but below analysts’ expectations of a firmer 1.8% SAAR gain. Weaker growth in the first quarter came amid ongoing turmoil in the housing market and a cool-off in exports. Behind the modest print were, however, a number of reasons for optimism; despite slower output growth, incomes held up. Moreover, business investment—which only rebounded a few quarters ago following years of sluggishness—posted solid gains in the quarter.
Domestic demand eased from the fourth quarter, growing at 2.1% SAAR from a quarter earlier (Q4 2017: +4.1% SAAR) on across-the-board downgrades. Growth in household spending halved, coming in at 1.1% SAAR (Q4 2017: +2.2% SAAR) as highly-indebted consumers felt the increasing pain of higher interest rates. Furthermore, growth in public spending also slowed (Q1: +2.7% SAAR; Q4 2017: +3.8% SAAR). Meanwhile, although fixed investment eased in the quarter (Q1: +3.9% SAAR; Q4 2017: +9.5% SAAR) on weaker residential outlays as new mortgage-lending rules came into effect, business investment continued to accelerate as firms hiked machinery and equipment outlays. Inventories continued to accumulate at roughly the same pace as in the fourth quarter.
Brian DePratto, Senior Economist at TD Economics, stated, “The writing was on the wall for international trade, but the final figures were not as bad as might have been expected.” Despite stumbling out of the gate, exports still posted modest growth from a quarter earlier (Q1: +1.7% SAAR; Q4 2017: +3.9% SAAR) and impressed to the upside as fears of transportation bottlenecks were ultimately overblown. That said, shipments of refined energy products plummeted from a quarter earlier. Imports, meanwhile, slowed to 4.9% SAAR (Q4 2017: +7.7% SAAR) growth. All told, the external sector again dragged on growth in the quarter, subtracting 1.1 percentage points from the headline reading (Q4 2017: minus 1.2 percentage points).
On an annual basis, economic growth moderated to 2.3% in the first quarter (Q4 2017: +3.0% year-on-year).
Commenting further on the first-quarter outturn, Mr. DePratto of TD Economics added:
“This is another 'more than meets the eye' national accounts report. Beneath modest headline growth were some relatively encouraging details. What's more, even the weak spots in today's report shouldn't last. The poor performance of housing was confined to the resale market, [which] can be attributed by and large to the B-20 mortgage underwriting changes implemented on 1 January—the worst impacts of which are likely behind us. On the trade front, fog continues to hang over the horizon, but the robust U.S. growth outlook provides a decent backdrop going forward [and suggests] the sector should at least cease to be a drag on growth. The bottom line is that the Canadian economy clearly still has some gas left in the tank.”