- Canada kicked off 2019 with modest overall growth as GDP grew just 0.4% (q/q, annualized). This was a bit below the consensus expectation of a 0.7% gain, but right in line with our final tracking. Nominal GDP, which includes the impact of price changes, did much better, climbing 5% as export prices recovered.
- The details of the report were better than the headline would suggest. Final domestic demand growth broke its downtrend, rebounding to a solid 3.4% gain. Consumption led the way as household spending climbed 3.5%, with all major categories showing solid gains. Business investment performed well. Investment in structures fell again, but machinery and equipment spending surged 39.5% in its strongest showing in more than 20 years. Spending in this category was broad-based, with particular strength in vehicles, notably aircraft. Government investment also came back, up 6.4%.
- Inventories rose, likely reflecting build-ups among manufacturers and wholesalers during the quarter, as well as a pricing environment that spurred little destocking in the energy sector despite production curtailments. Notably, the climb (which added 0.7 percentage points to growth) was smaller than might have been expected, probably due to the strength of business spending.
- On the negative side, residential investment fell for a fifth straight quarter (-6.1% q/q saar). New construction (-13.7%) and ownership transfer costs (-12.2%) were the culprits.
- The biggest contributor to the soft headline number was a weak export performance. Headline exports fell 4.1%, driven by goods (-5.7%), notably energy products. Inventories and investment appear to have been fed by imports, up 7.7% on the quarter, largely due to goods imports (+9.6%), notably motor vehicles, aircraft, and consumer goods.
- Turning to incomes, total employee compensation gained 4.2%. With consumers continuing to spend, the household savings rate fell to 1.1% from an upwardly revised 1.4% in Q4. On the corporate side, a modest rebound of the gross operating surplus (+5.6%) was seen.
- We also received the monthly GDP data today, showing better momentum heading into spring. Economic activity rose 0.5% month-on-month in March, a solid showing. 16 of 20 major industries expanded, with goods-producers (+0.7%) leading the way on strength in mining/quarrying/oil and gas (+2.0%) and manufacturing (+0.9%). Service industries weren’t far behind, up 0.4% as a whole on solid wholesale, transportation, and real estate activity.
Key Implications
- Don’t let the headline fool you, this was a pretty decent GDP report. Final domestic demand finally broke its downtrend, with impressive strength seen in business spending on machinery and equipment – its best quarterly performance since 1996, bringing the level of spending back to pre-crisis levels. It was a good story on the household side too – soft retail sales volumes seem to have been a bit of a red herring, as spending growth ramped up to 3.5%, its best showing in more than a year.
- This gives us good hope that the soft patch is indeed behind us. Some areas in today’s report, such as investment in aircraft, tend to be lumpy, so a repeat is unlikely, but we’re still set up for a good acceleration of output into the second quarter. The robust 0.5% monthly climb in March, solid jobs and housing data already seen in April, and easing of curtailments on oil production all augur well for growth. While we’ll have to run through the numbers carefully in the coming days, early analysis suggests growth around the 2% mark in the second quarter is achievable.
- The messaging from the Bank of Canada ahead of today’s data was that it would likely carry less weight than normal, but Governor Poloz and team are likely to be happy with today’s showing. One month is hardly a trend, but the March data suggests that the economy remains on track. Solid labour markets seem to finally be translating into stronger consumer spending. But, with the international backdrop still highly uncertain (witness the conflicting signals from the U.S. yesterday of CUSMA ratification alongside potential new tariffs on Mexico), the path forward for the Bank of Canada will be determined by the economic outcomes in the months and quarters ahead, leaving monetary policy stasis the best assumption.
