OTTAWA – The brutal winter iced Canada’s recovery to the worst growth rate in more than a year as businesses held off on investments and many other key sectors shrank or recorded weak gains.
Statistics Canada said Friday that the country’s gross domestic product advanced to 1.2 per cent, about a half a point below economists’ expectations for the first quarter of the year.
That’s not as bad as the one per cent retreat recorded in the United States, but it was the weakest since the fourth quarter of 2012.
“Frankly, it only looked good in comparison to what happened in the U.S.,” said Bank of Montreal chief economist Doug Porter.
“It was a pretty weak quarter all around, there’s not many positives,” he said.
Porter noted that the bottom-line number was flattered by the deep dive in imports, which meant trade made a positive contribution despite the fact that exports fell.
The hope going forward — and the expectation of many economists — is that the better weather in the spring months will help heat up Canada’s economic activity, including getting shoppers back into the malls and business finally investing in expansion and productivity improvements.
But David Madani of Capital Economics noted that the March growth rate, the last month of the quarter, only came in at 0.1 per cent over February’s, so even that hope may be optimistic.
There were few things to cheer in the Statistics Canada report and markets reacted by dropping the Canadian dollar 0.18 of a cent to 92.1 cents US after its report.
But the major strength in the economy remained Canada’s resource sector, particularly the oil patch. Mining and oil and gas extraction grew a robust 2.4 per cent in the first quarter over the previous quarter, while utilities increased by 1.2 per cent.
Statistics Canada revised downward the fourth quarter growth rate from the previously reported 2.9 to 2.7 per cent, and January’s strong 0.5 per cent GDP reading was trimmed back to 0.4.
For the Bank of Canada, which had expected a growth rate of 1.5 per cent for the quarter, the news was likely not bad enough to change its rather dovish stance on the economy, although Madani said governor Stephen Poloz should not be so quick to take rate cuts completely off the table.
Most analysts believe however than next week’s policy setting will see the bank remain on the sidelines and signal no directional change from a position it has held for months — that interest rates aren’t moving north any time soon and when they do, it will be in measured and modest instalments.
The most disappointing aspect of the Statistics Canada report for the central bank will be that business investment in machinery and equipment fell by 1.5 per cent from the fourth quarter, with spending on computers falling 4.1 per cent.
Poloz has been calling on businesses to pick up their investment, particularly as profits have been strong, to improve productivity and take the economy into the next phase of the recovery.
But with business still having plenty of capacity to ramp up production when needed without adding more, CIBC chief economist Avery Shenfeld said there was little incentive for firms to invest.
The details of the report Friday were as weak as the headline.
Final domestic demand slid by 0.1 per cent in quarter-over-quarter comparisons, business capital formation fell 0.9, exports fell 0.6 and exports of goods fell 0.8, business construction in residential structures dropped 1.6 and new home construction decreased 1.5, while real estate activity plunged 6.4 per cent.
Overall, the services sector increased by 0.3 per cent quarter-over-quarter, while the goods producing industries increased by 0.6 per cent.
In a welcome development for governments, the agency said nominal GDP increased by 1.7 per cent over the previous quarter — a whopping 6.8 per cent annualized — largely because export prices rose by 5.3 per cent, the most in almost six years. Nominal GDP, which tracks the value of economic activity, is critical to tax revenues.
That means Canadians were producing less, but getting more in return for their exports, which improves the country’s terms of trade and contributed to a healthy 1.2 per cent quarter-over-quarter increase in employee compensation.
“Still, in terms of purchasing power, it wasn’t a huge win for households, since consumer inflation was also driven faster by higher prices for energy and services,” noted Shenfeld.
The agency also reported that the household savings rate improved moderately to 4.9 per cent from 4.8 per cent in the previous quarter, as disposable income increased at a slighter faster pace than household spending.