The Canadian economy grew by 1.3% q/q annualized in the first quarter, a bit slower than the prior quarter’s 1.7% pace. Price gains were fairly modest as well, sending nominal GDP to 2.6%.
Non-residential business investment helped send output higher. Structures investment grew by a healthy 6.3% pace, but even more impressive was an 18.1% climb in investment in machinery and equipment, assisted by a surge in business spending on vehicles.
In contrast, consumer spending, although positive, came in below expectations, rising just 1.1%. Spending on goods was effectively flat, while service consumption held up (+2.1%)
On the negative side of the ledger were, as expected, housing and trade. Residential investment fell 7.2% owing entirely to a 44% drop in ownership transfer costs (i.e. resale activity). In contrast, new construction and renovation activity both performed well, up 5% and 5.9% respectively.
The writing was on the wall for international trade, but the final figures were not as bad as might have been expected. Exports rose 1.7%, helped by a 6.8% gain in services (goods exports were effectively flat), while imports rose 4.9%.
While output disappointed, incomes managed to hold up. The aggregate measure of employee compensation was up 4.0%. Household disposable income gained 3.7%, not quite enough to keep the (revised) savings rate flat, as it fell one tick to 4.4%.
The quarter ended on something of a positive note. Monthly GDP for March was up 0.3% m/m, with 15 of 20 major industries recording growth and solid gains in both the goods-producing (+0.6%) and services-producing (+0.2%) sectors of the economy.
Key Implications
This is another ‘more than meets the eye’ GDP report. Beneath modest headline growth were some relatively encouraging details. Business investment continued to climb, partially offsetting the more modest pace of consumer spending. Income gains also remained solid. Plus, March’s solid monthly performance indicates that momentum continued to build through the quarter, setting the Canadian economy up for an acceleration in output in Q2.
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. This can be attributed by and large to the B-20 mortgage underwriting changes implemented on January 1st, 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, suggesting that 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. We remain confident that economic growth will remain modestly above potential for 2018 as a whole. Accordingly, conditions will stay supportive of a Bank of Canada hike at its next meeting in July.
