Highlights:
- Canadian GDP jumped 3.7% in Q1 (at an annualized rate) to build on 2.7% and 4.2% increases in Q4 and Q3 of 2016, respectively.
- Household spending remained strong (consumer spending up 4.3%, residential investment up 15.7%) but, unlike earlier quarters, business investment was also a significant support to Q1 growth.
- Monthly GDP rose a stronger-than-expected 0.5% in March, pointing to strong momentum through the end of the quarter.
Our Take:
Strong economic growth in Canada is not really new. The 3.7% GDP jump in Q1 2017 marked a third consecutive gain above our estimate of the economy’s ‘potential’ long-run growth rate and a third consecutive outperformance relative to the U.S. Perhaps the most important takeaway from the Q1 numbers was a strong gain in business investment. The 10.3% annualized quarterly increase was the largest in almost 5 years and followed two years of persistent declines. Business investment has been a missing ingredient from earlier improvements which were driven largely by stronger household expenditures.
Q1 growth was not significantly different than the Bank of Canada’s 3.8% forecast and there are still plenty of risks to the outlook, particularly from potential U.S. trade disruptions. Growing evidence that business investment has begun to rise again, however, means those concerns will have to be balanced against firmer current economic conditions that argue that ultra-low levels of interest rates may otherwise no longer be needed. We expect the bank to maintain a very cautious tone in the near-term, reflecting uncertainties about the U.S. and the lack of evidence that consumer price inflation is strengthening, but assume that further economic growth will eventually prompt the central bank to begin hiking rates at a gradual pace by mid-2018.
