Canadian GDP rose 0.4% month-on-month in February, helped by the resolution of earlier setbacks in several industries. While the strong outturn was driven by a few outsized gains, there was nevertheless solid breadth to the expansion as 15 of 20 major industries reported increased output.
Goods producing industries did well in February, led by mining, quarrying and oil and gas extraction, up 2.4% following a 2.9% drop in January. Production began to move back to normal in February following some issues in the month prior. Manufacturing also turned in a solid performance (+1.0%), as transportation equipment manufacturing picked back up following unusual plant shutdowns in January. Rounding out the broader sector were solid gains construction (+0.7%) and agriculture (+0.5%). Utilities output was down 0.9% in February owing to warmer than normal weather in Central and Eastern Canada.
The service side of the economy eked out a small gain (+0.1%), although revisions to January mean that the 21 month expansion streak came to an end last December. On the negative side of the ledger was, unsurprisingly, real estate (-0.2%), which fell for a second month, consistent with the soft resale activity seen in February. The bulk of sub-industries saw expansions however, with notable gains in professional services (+0.6%), arts and entertainment (+1.4%), and transportation (+0.5%).
Key Implications
What a pleasant surprise. While a rebound in growth was likely given the one-off disruptions that held back January, in the event, the Canadian economy saw a healthy pop back in growth in February. Even better, the outturn came on the back of fairly widespread growth, suggesting healthy underlying momentum.
As it stands, February’s performance points to an expansion of about 1.7% annualized in the first quarter. This is roughly in line with Canada’s underlying potential and a modest improvement over our initial expectation for the quarter. We remain of the view that some modest pick-up of growth is likely through the middle of the year, but with economic slack effectively absorbed, the first quarter’s growth rate represents the pace that Canadians can expect in coming years.
For the Bank of Canada, today’s report will not be a huge surprise, with our growth tracking of 1.7% not too far off their forecast of a 1.3% quarterly expansion. More important will be the evolution of the economy over the remainder of the year. Not only do the ‘standard’ metrics such as core inflation, wages, and business investment matter, but so too does the reaction of Canadian borrowers to higher borrowing costs. We will receive more insight on this latter point this afternoon when Governor Poloz speaks in Yellowknife.
