Canada: GDP growth sluggish in Q1 despite surging domestic demand
Economic activity picked up slightly in the first quarter, with seasonally-adjusted annualized (SAAR) growth accelerating from Q4’s downwardly revised 0.3% (previously reported: +0.4% SAAR) to 0.4% in Q1. In annual terms, economic growth weakened to 1.3% in the first quarter (Q4: +1.6% year-on-year).
Domestic demand snowballed 3.4% in the first quarter, contrasting Q4’s 1.0% dip. A rebound in gross fixed capital formation powered the jump in domestic demand (Q1: +4.1% SAAR; +Q4: -8.9% SAAR), partly due to a turnaround in business investment. Moreover, private consumption growth gained impetus, accelerating 3.5% in the first quarter (Q4: +1.0% SAAR), while government spending growth also ticked up (Q1: +2.2% SAAR; Q4: +2.1% SAAR).
Turning to the external sector, the acceleration in headline growth figure was partially offset by a reduction in exports and solid import growth. In the first quarter, exports of goods and services plunged 4.1% in seasonally-adjusted annualized (SAAR) terms, after increasing 0.3% in Q4 2018. Meanwhile, imports of goods and services increased 7.7% in Q1, contrasting the 0.7% drop the quarter prior. As a result, the external sector subtracted 3.8 percentage points from the first quarter’s headline growth, after contributing 0.3 percentage points in the final quarter of 2018.
Commenting on Q1’s GDP print, Benoit P. Durocher, senior economist at Desjardins, noted:
“The rise in consumer spending is good news, as it suggests that the adjustment to higher interest rates has advanced significantly. The return to positive territory for business investment is promising, although the outlook for this component remains unclear, especially since the United States announced it would impose customs tariffs on Mexican imports. This could delay the ratification of the Canada–United States–Mexico Agreement.”
Taking a more pessimistic view regarding the ratification of USMCA, research analysts at Nomura warned:
“President Trump’s action could effectively derail ratification of the US-Mexico-Canada (USMCA) agreement this year. Republicans in Congress have pushed back against previous tariffs from the administration targeting Mexico or Canada and the action announced tonight will likely engender strong opposition in Congress.”
Looking ahead, economic growth should taper this year on the back of relatively higher interest rates and global trade uncertainty. Moreover, concerns over the ratification of the USMCA will likely dampen business investment and confidence. Nevertheless, Trump’s decision to lift tariffs on Canadian steel and aluminum, and positive developments in the energy sector bodes well for economic growth.