A Look At Canada's GDP

Canada: GDP grew 2.5% annualized in the first quarter of 2013, two-ticks higher than consensus expectations, after an upwardly revised +0.9% print in the prior quarter. In Q1, the economy got a boost from trade, domestic demand and inventories, the latter adding 0.5% to growth. Domestic demand benefited from contributions from consumption (although the weakest since 2009), business investment, and even government, which more than offset the expected drag from residential construction. The relatively soft consumption was due to a deceleration in disposable incomes which grew just 1.1% annualized in real terms (the lowest since 2011), and a one-tick increase in the savings rate to 5.5%.

The monthly GDP data showed a 0.2% (un-annualized) increase in March output. Strong gains in the resources sector and utilities more than offset declining output in construction and manufacturing (although auto/parts production was up), allowing the goods sector to expand 0.4%. Services output rose 0.2% as gains in retailing, finance/insurance, real estate, info/culture, more than offset declines elsewhere including the 0.2% drop in wholesaling.

The GDP report was better than expected on the headline, although the details are a bit less impressive. Final sales, i.e. GDP excluding inventories contributed 2% to growth, less than the prior quarter’s 3.5%. The bulk of Q1 growth came from trade, thanks to the acceleration in US economic activity. With signs of Q2 weakness south of the border, it’s unclear if trade can repeat the feat in the current quarter.

The broadest measure of trade, the current account, showed a deficit of C$14.1 bn in 2013Q1, down C$0.5 bn from 2012Q4. The improvement was largely due to the merchandise trade deficit, which shrank C$450 million, although deficits on the services and investment income accounts contracted slightly as well. In Q1, the current account deficit was financed primarily by foreign direct investment, up more than C$5 bn to C$18.6 bn, and C$9.3 bn in net foreign inflows in portfolio investment (although this was much less than in recent quarters, as record inflows into bonds were offset by net outflows for equities and money market instruments).

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