Canada Growth in 1Q Stagnates as Consumer Spending Slows

Canada’s economic growth rate stagnated in the January-March period as consumer spending increased at the slowest pace in three years, raising the chances of lower interest rates by the end of 2012.

Gross domestic product grew at a 1.9 percent annualized pace in the first quarter, matching the revised rate of the prior three months and the median forecast of 27 economists surveyed by Bloomberg. The economy grew 0.1 percent on a monthly basis in March, Ottawa-based Statistics Canada said today, less than the median economist forecast of 0.3 percent.

Investors raised bets on a Bank of Canada interest-rate cut by year-end, as the slowest U.S. job gain in a year also threatened future growth. Governor Mark Carney said in April that first-quarter growth would be 2.5 percent and that an interest-rate increase “may become necessary.”

“Growth in Canada was pretty soft in the first half of the year, certainly quite a bit softer than the Bank of Canada was expecting,” said Robert Kavcic, an economist in Toronto at Bank of Montreal. “Given the swirling headwinds in Europe and the fact the U.S. economy has clearly slowed, I certainly wouldn’t expect any more hawkish rhetoric from the bank.”

Canada’s dollar and bond yields dropped today after the U.S. reported a 69,000 May job gain that suggests a stalling labor-market recovery. The currency depreciated 0.5 percent to C$1.0379 cents per U.S. dollar at 9:45 a.m. in Toronto. One Canadian dollar buys 96.35 cents.

Rate Cuts

Swaps trading today shows investors have fully priced in a 25-basis-point rate cut by year-end, with about a 47 percent chance it will decline to 0.75 percent versus about a 15 percent chance it will remain 1 percent. The 10-year government bond yield fell as low as 1.64 percent, a record, from yesterday’s

1.74 percent.

Today’s report on first-quarter output is the last major indicator before the bank’s June 5 interest-rate decision. The key policy rate has been 1 percent since September 2010, the longest unchanged period since the 1950s.

Consumer spending growth slowed to a 0.9 percent annualized pace in the first quarter from 2.8 percent at the end of last year. Total domestic demand growth slowed to 1.3 percent from

1.6 percent. Both measures rose at the slowest pace since 2009.

Cautious Consumers

Chief executives of retailers from Edmonton, Alberta-based furniture chain The Brick Ltd. to home-improvement chain RONA Inc. say consumers are cautious.

“It appears that consumer uncertainty will continue in the near term,” Violet Konkle, Chief Executive Officer at The Bricks, said on a May 8 earnings call.

Carney and Finance Minister Jim Flaherty have been urging consumers to be careful with debts for more than a year. Low interest rates have fed a housing boom and Carney has said that record consumer debt burdens are the biggest domestic economic risk. Housing investment grew for a fifth straight time in the first quarter, Statistics Canada said today.

The personal savings rate fell to 2.9 percent in the first quarter, down from a peak of 6.8 percent in the second quarter of 2010 and the lowest since 2007, Statistics Canada said.

Business Investment

Business investment rose for the ninth straight time in the January-March period, posting a 4.9 percent gain. Company spending on inventories also added to growth, with accumulation quickening to C$9.52 billion ($9.17 billion) from C$5.19 billion in the fourth quarter.

Export growth slowed to 2.5 percent in the first quarter from 7.2 percent, while import growth accelerated to 4.4 percent from 2.3 percent.

The Canadian dollar traded close to parity with the U.S. dollar throughout the first quarter, and Carney has said its persistent strength is a challenge to business competitiveness.

The U.S. economy grew 1.9 percent in the first quarter, the Commerce Department said yesterday.

Economists forecast Canadian growth won’t accelerate much later this year, predicting a pace of 2.3 percent in the fourth quarter.

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