June 01, 2021 | 09:14
Canadian GDP Still on Track for Solid 2021
Canadian real GDP started 2021 on a solid footing, rising at a 5.6% annual rate in Q1, before sagging again in April amid third-wave restrictions. The first quarter read was roughly a percentage point below expectations, with most of the surprise on a big drawdown in inventories. But the bigger picture is that the Canadian economy has shown a clear ability to rebound rapidly when it even partially re-opens, and we would expect a similar quick comeback in coming months.
It's almost like an archeological dig going into the details of Q1, given that we are now barely 29 days from Q3, but it does show how the economy fared with the tail end of the second wave. No surprise, the biggest driver was the housing market, as residential construction soared past lofty expectations with a 43% spike. That leaves this sector at a massive 10.3% of nominal GDP in the quarter, easily a record and 3 percentage points above pre-pandemic levels. Most aspects of final sales were solid in Q1, with consumers a bit stronger than expected (2.8% a.r.), government adding (5.8%), and net exports also contributing. In contrast, business investment was one real source of disappointment, with equipment spending surprisingly falling. But the biggest drag came from a drop in inventories, with this factor alone cutting growth 1.4 ppts in Q1, and versus expectations it could add a touch. The good news is that this should reverse in Q2, supporting activity in the current quarter.
On the monthly figures, there were few big surprises. March's initial flash estimate of +0.9% was nudged up in the official estimate to +1.1% as the economy began to re-open from the second wave. However, StatsCan estimates that the economy then fell 0.8% in April, as the third wave bore down. This would mark the first monthly setback in the economy since last April's deep dive, breaking an 11-month string of gains. Given the wave of downbeat results for April, the setback is zero surprise, and may well be followed by a soft May. Even so, we still expect a strong June will keep Q2 roughly flat overall, and look for robust Q3 growth.
While real GDP was below expectations in Q1, note that nominal GDP was much stronger than expected as the deflator flared higher at a massive 12.2% annual rate in the quarter. Nominal GDP thus sprinted at a18.4% clip in Q1, lifting it above pre-pandemic levels. And, ultimately, it is nominal GDP that drives incomes, profits and government revenues. And, the underlying strength in incomes helped lift the saving rate again to 13.1% in Q1 from 11.9%, and a pre-pandemic trend of 2% or less.
Bottom Line: On balance, even with the many moving parts in today's report, we remain entirely comfortable with our estimate of 6.0% GDP growth for all of 2021, following the deep 5.3% setback last year (revised slightly from the earlier -5.4%).