Canada GDP Growth Picks Up in 1Q But Pace Lags Expectations — 2nd Update

By Robb M. Stewart

OTTAWA--Canada's economy rebounded in the early months of the year but failed to show the growth expected even with strong household spending, heightening views that consumers could see some relief as early as next week with the start of a rate-cutting cycle.

After stalling in the second half of last year, gross domestic product rose at a seasonally adjusted annualized rate of 1.7% for the first quarter, to 2.366 trillion Canadian dollars, the equivalent of US$1.729 trillion, Statistics Canada said Friday. That was slower than the 2.2% growth economists anticipated and well below where the Bank of Canada expected the economy to be.

The pace of growth, while the strongest in a year, again lagged the country's swelling immigration-driven population and comes on the heels of signs inflationary pressures continue to ease and the labor market loosen as unemployment continues to rise. The GDP report will be the last key indicator the Bank of Canada's governing council collects before next week's policy meeting, and for some economists offers up just enough of a soft picture of the economy to get policymakers off the sidelines.

The softer-than-anticipated growth for the first quarter was largely thanks to a slower build-up in business inventories, a volatile component of GDP, which moderated a 3.0% rise in household spending that was the biggest driver of expansion for the period. Final domestic demand, a gauge of underlying momentum in the economy, was up a strong 2.9%, though that follows a string of weak readings and no change the quarter before.

Revisions wiped out most of the growth previously estimated for the final quarter of last year, with GDP registering a 0.1% annualized advance that followed a slight contraction in the third quarter of 2023.

The Bank of Canada was projecting strong growth this year and into 2025, with annualized GDP expected to rise 2.8% in the first quarter and average 1.5% over this year. Statistics Canada's data showed industry-level growth flatlined in March from the month before, though an advance estimate points to growth of 0.3% in April, which would support the central bank's view growth will accelerate but from a softer starting point.

"The downside surprise in Canada's first-quarter GDP growth likely removes the last potential barrier preventing the BoC from easing off the monetary policy brakes with an interest rate cut next week. The economic data still hasn't deteriorated in a way that is forcing urgent BoC action, but a slow bleed over the last two years has left per-capita output back at 2016 levels," Royal Bank of Canada assistant chief economist Nathan Janzen said.

He and other economists expect the Bank of Canada to lower its benchmark overnight rate by 0.25 percentage point, to 4.75%, on Wednesday, having left it steady at a more than two-decade high at each of the last six policy meetings.

That would follow cuts in recent weeks by the Swiss National Bank and Sweden's Riksbank, but would be an earlier move than is expected from the Federal Reserve after inflation in U.S. proved sticky early in the year. Growth in the U.S. economy has pulled back this year with GDP expanding at a 1.3% annualized pace in the first quarter, slower than previously estimated thanks largely to softer consumer spending.

Royal Bank's Janzen estimates Canada's population increased 3% in the first quarter of the year, which would indicate per-capita GDP shrank 1.3% at an annualized rate for the three months and would mean it has now declined in six of the last seven quarters.

Inflationary pressures have eased broadly, with the annual consumer-price index rising in April at its slowest pace in three years at 2.7%. The unemployment rate has risen steadily in recent months, climbing to the highest since the start of 2022 despite continuing hiring, and wage growth more recently has shown signs of cooling. The Bank of Canada has said it doesn't need inflation to hit its 2% target before it starts cutting but it is looking for signs core price pressures are easing sustainably.

The rise in household spending from the quarter was mainly on services and led by rent, which has jumped since the central bank in early 2022 began its aggressive campaign to tackle inflation by ramping up interest rates, as well as telecommunications services and air transport. Spending on goods was more modest, and driven by purchases of new trucks, vans and sport-utility vehicles.

On a per-capita basis, household final consumption edged up 0.1% following three quarters of declines, and was focused entirely on services as spending on goods dropped for a 10th consecutive quarter. At the same time, the household savings rate reached 7.0%, the highest since the first quarter of 2022 and the squeeze to budgets of rising rates.

"The reality is that underlying growth remains well short of potential and slack is building for the overall economy. For the Bank of Canada, we believe the main message is that the output gap is widening," Bank of Montreal chief economist Douglas Porter said.

Porter said that while there is an argument for the central bank to again wait for more data, he believes the balance of evidence points to a modestly increased change of the first rate cut next week, a call he has been making since late last year.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 31, 2024 11:41 ET (15:41 GMT)

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