Economy has best quarter since 2011, but analysts not convinced of staying power

OTTAWA – Canada’s economy rebounded strongly from a half-year of sub-par growth, posting an above-consensus 2.5 per cent advance in the first three months of the year and setting the country on a stronger recovery path.

The report from Statistics Canada also revised the economy’s speed from 0.6 to 0.9 per cent for the fourth quarter of 2012, and from 0.7 to 0.8 per cent in the third quarter of last year.

The first quarter was the best three-month gross domestic product performance since 2011, and the 0.2 per cent month-to-month advance for March — the last month of the quarter — provided a solid launch to the rest of the year.

Finance Minister Jim Flaherty welcomed the news while warning that “unemployment hit a record high in European Union (in) another reminder of the fragility of the global recovery and the external threats to Canada’s economy.”

Analysts were also not so quick to give Canada’s economy a pass either, pointing out that all of the growth was based on an exceptionally strong exports performance, and in particular from natural resources.

“We’ll take 2.5 per cent growth versus what the economy looked to have been tracking earlier in the year,” said Derek Holt of Scotiabank Economics.

“That said, the quality of the print was weak because of the heavy role played by … mining, oil and gas extraction activities. The pace of gains in both total exports and output in the mining, oil and gas extraction sector are both not likely to be sustained.”

Desjardins Capital Markets economist Jimmy Jean wrote in a note that incoming Bank of Canada governor Stephen Poloz was unlikely to take comfort in the result during his first public appearance as governor next Thursday at the House of Commons Finance committee. Most troubling, he said, was the small decline in business investment in machinery and equipment.

“This does no other than reinforce our view that there will be no valid reason for the bank to hike (interest rates) before late 2014,” he said.

On Wednesday, the Bank of Canada had predicted the first quarter would be stronger than the 1.6 per cent it had initially anticipated, but it tellingly offered no such assurance for its 1.5 per cent growth call for the rest of the year.

The U.S. economy has suffered a slowdown in the second quarter due to government spending restraints, and given the ongoing recession in Europe and the speed bump in China, the view is that Canada can’t continue to out-pace the rest of the world.

“We don’t expect a break-out in quarter two,” said Doug Porter, chief economist with the Bank of Montreal. But he added the news could be better later in the year and in 2014 if the U.S. economy does indeed start picking up.

Analysts say Canada’s economy is in a difficult transition period, from one supported by a strong housing sector and consumer spending, to one that must rely on exports and business investment.

There was evidence of the hand-off in the first quarter results.

Final domestic demand was an anaemic 0.6 per cent as consumer spending came in at a soft 0.9 and residential construction contracted 4.7 per cent annualized.

All the growth was in the exports sector, which made up 1.4 per cent of the total GDP advance. Mining, oil and gas extraction rose 1.2 per cent and utilities 2.1. As well inventories added to the growth.

The public sector contribution was a mixed bag.

“While government goods and services spending was also surprisingly firm, growing at a two per cent rate, government capital spending, fell by a two per cent pace,” CIBC World Markets economist Emanuella Enenajor noted.