Canadian Economy Expanded 1.9% In Q1

Canadian GDP grew 1.9% annualized in the first quarter of 2012 (top chart), in line with consensus expectations. That was well below the Bank of Canada’s estimate of 2.5% for the quarter. The prior quarter (Q4) was revised up one tick to 1.9% annualized. Domestic demand softened a bit with growth of just 1.3% in Q1, after a 1.6% annualized increase in the prior quarter. Restraining domestic demand was tepid consumption spending which was up just 0.9% annualized, and the drag from government whose spending contracted 1.7% in Q1. Business investment in machinery and equipment provided some offset rising 4%. Residential construction
grew 12.3% in line with strong housing starts. Trade was a drag on GDP as the increase in exports was more than offset by higher imports. Inventories contributed to GDP for the first time in three quarters.


The monthly GDP data showed only a 0.1% increase in output in March and that was worse than expected. The resources sector did poorly and offset the strength in manufacturing and construction. Overall in Q1, the resources sector contracted almost 4% annualized after a flat Q4. Weakness there was, however, more than offset by healthy expansions in the wholesale, construction, finance/real estate and manufacturing sectors (middle chart).

OPINION: The Q1 GDP report was disappointing even considering the upward revision to Q4. The soft handoff from March means that Q2 won't be stellar either and we wouldn’t be surprised to see a third consecutive sub-2% print. Looking further ahead, domestic demand is set to remain soft. The savings rate is now at its lowest since 2007 (bottom chart) and that should curb consumption. Moreover, while investment intentions are good according to the latest BoC business outlook survey, odds are that businesses may delay outlays because of Europe-related uncertainties. All told, expect the BoC to tone down its hawkish language quite significantly.