EconoFACTS

May 31, 2024 | 09:12

Canadian GDP: Generally Downbeat Picture

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Canada's economy cooled notably in the early spring after a decent start to the year. First quarter real GDP growth came in below expectations at a 1.7% a.r. (consensus was around 2%), and the prior quarter was cut to a mere 0.1% a.r. (from 1.0%). The monthly pattern through the quarter reveals an ebbing from a blistering 0.5% pop in January, to a moderate 0.2% in February, and then a flat reading in March. However, StatCan's flash estimate suggests that GDP then popped back 0.3% in April. Taking all these pieces together, the economy churned out some moderate underlying growth in the first four months of the year, but has come up well light of the Bank of Canada's latest estimates—they had pencilled in 2.8% growth in Q1, and then 1.5% for Q2. The latter is still well within reach, but we now know the starting point was much softer. Over the past four quarters, growth has managed just 0.5% y/y, or nearly 2 ppts below estimated potential growth.

The details for the Q1 figures were much better than the headline, as a deep cut in inventories alone carved 1.5 ppts from overall growth. Net trade made a small contribution, while consumer spending was better than expected at 3.0% (no doubt boosted by the freakishly mild winter). Business investment also rose a sturdy 3.5%, albeit after a thrashing in the second half of last year. Government spending and housing both posted moderate gains. A few other notable details from Q1: The personal savings rate rose to 6.9%, the highest in two years. The GDP deflator fell 1.5%, clipping the annual increase to a still-decent 3.5% pace. So nominal GDP barely grew last quarter (up 0.3% a.r.), and is up 4.0% y/y. Corporate profits fell heavily for a second consecutive quarter and are down a hefty 26.9% in the past year: Corporate greed? Try again.

The pullback in March GDP was no big surprise, given all the soft monthly indicators going into the release. Each of manufacturing, retail and wholesale fell in real terms, while even the public sector saw a small pullback in activity. The softness hit goods and services, with both printing a flat result for the month. Some of the sluggish March may have been due to the timing of an early Easter this year, which, in turn, helped activity bounce back in April. Manufacturing, resources, and wholesale trade apparently keyed the recovery. If the April gain is confirmed, we look for Q2 growth to largely mirror the Q1 outcome (i.e., something between 1.5% and 2.0%, annualized).

Bottom Line: Looking through all the monthly and quarterly wobbles, the big picture is that Canada's economy has expanded by a meagre 0.5% in the past year. While the downside surprise in Q1 was driven by a big cut in business inventories, the reality is that underlying growth remains well short of potential, and slack is building for the overall economy. For the Bank of Canada, we believe the main message is that the output gap is widening, as reinforced by a less-tight job market, modestly increasing the chances of a rate cut next week. There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut—we've been calling for a June cut since late last year, and will stand by that call.

Table 1 - Canada — Real GDP

(qtr/qtr % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics

Table 2 - Canada — Monthly Real GDP

(month/month % change)

Source: BMO Economics, Haver Analytics