EconoFACTS

May 31, 2023 | 09:21

Canadian GDP: Hanging Tough

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

The Canadian economy started the year on a strong footing, with real GDP rising at a perky and above-consensus 3.1% annual rate in Q1. On top of the solid quarterly read, the monthly pattern heading into Q2 was firmer than anticipated, with March's initial 0.1% dip revised to flat, and the early estimate for April pointing to a surprisingly sturdy 0.2% advance. Combined, this suggests that the economy is headed for some modest growth in the current quarter, even with the double drags of the public sector strike and the Alberta wildfires.

Digging into the details, the 3.1% Q1 rise was above the early estimate of 2.5% (and the BoC's latest 2.3% call), and a nice rebound from the 0.1% drop in Q4 (revised from 0.0). A generally mild winter helped, and consumers stayed out in force with a 5.7% rise (even stronger than the robust 3.8% rise in U.S. consumption in Q1). In contrast to the U.S., net exports more than offset a slowdown in inventories, and final sales ripped at a 5.5% clip. Business investment and government chipped in with small gains, while housing retreated heavily again (-14.6%). However, the big drag from the latter looks to be done, with sales and starts rebounding to start Q2.

One notable aspect in Q1 was a sharp fall in the personal savings rate to 2.9%, the lowest since pre-pandemic days. The combination of the pop in spending and a slowdown in government transfers cut the rate in half from Q4 levels (5.8%). Also note that the GDP deflator was back in positive terrain after back-to-back drops, rising at a modest 0.9% pace in Q1. Even with all the ups and downs of the past year, overall nominal GDP is now up 3.6% y/y, real GDP is up 2.2% y/y and the deflator is up 1.3% y/y—all of which would have qualified as quite normal in pre-COVID times.

The flat March GDP was up a tick from the flash estimate. Goods were -0.1%, with weaker agriculture and manufacturing output offsetting a big 1.2% gain in mining and oil & gas. Services were flat, with declines in wholesale, retail & hospitality balanced by strength in recreation, education and other services, including the public sector.

Perhaps the biggest eye-opener in today's report was the flash estimate for April GDP at +0.2%, despite the public sector strike in the second half of the month. We estimate that the strike likely trimmed at least a couple of ticks from growth (albeit with a wide range of uncertainty). The main point is that there's more underlying momentum in the economy than anticipated, and we will be revising up our Q2 GDP forecast from what had been a small drop (-0.5% a.r.) to a small positive.

Bottom Line: Each of the main figures here are better than expected—Q1, March and April GDP—and the details were solid for Q1 as well. The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week's policy decision. However, given the uncertain backdrop and the possibility that inflation took a big step down in May, the BoC could opt to remain patient for a bit longer and signal that it's open to hiking in July if the strength persists.

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