Canada – Real GDP expanded at an annualized pace of 2.4% in the first quarter of 2016 (chart), shy of consensus expectations. This bad news was made worse by downward revisions to all quarters last year: growth in 2015 turned out to be 1.1% instead of 1.2% as initially reported. Getting back to 2016Q1, trade was a major contributor to growth as exports advanced faster than imports. Domestic demand was supported by consumption (+1.3%), which picked up thanks to gains in real disposable income and a drop in the savings rate, and by residential investment (+0.8%) and government spending (+0.2%), but was sapped by business investment, which continued to slide (-1.1%). Inventories were a drag on growth for a fourth consecutive quarter, though this could be a positive for production later this year provided demand accelerates and businesses move to restock. Other pieces of good news from the report came with huge caveats. For instance, the growth in consumption was partly due to a sharp drop in the savings rate to a two-year low of 3.9%. This does not bode well for consumption spending, particularly if the labour market softens, as we expect it will. Moreover, it is not clear whether the uptrend in residential investment is sustainable.
The monthly GDP data by industry showed March output decreased 0.2% (unannualized) owing to declines in the goodsproducing sector (-0.8%). Output in the service-producing industries was roughly flat. The poor handoff from March darkens the pall already cast over Q2 by the Alberta wildfires. This suggests that Canada’s economy likely contracted in the second quarter, though a rebound is expected in Q3 in sync with clean-up and rebuilding efforts and the recovery in oil production. However, one mainstay continues to break through this seesaw pattern, namely, waning business investment. A declining capital stock of machinery and equipment is a clear negative for potential growth, as this will cap actual growth going forward. Consequently, we remain comfortable with our belowconsensus call of just 1.3% GDP growth for Canada in 2016.
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