Canada First-Quarter Growth Slows as Harsh Winter Bites

Canada’s economic growth slumped in the first quarter as a harsh winter in North America slowed housing construction, business spending and exports.

Gross domestic product grew at a 1.2 percent annualized pace in January through March, compared with a downwardly revised 2.7 percent in the prior three months, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg predicted growth would slow to a 1.8 percent pace.

Severe weather in North America this winter added another hurdle for exporters and businesses that the Bank of Canada says must take over as drivers of growth in order to use up spare economic capacity. The central bank has held its benchmark rate at 1 percent since 2010 as Canada has struggled to emerge from the global recession with much speed.

The report “really highlights there is tremendous slack in the economy,” said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The data reinforces expectations that “interest rates are on hold,” she said.

Canada dealt with the bad weather better than the U.S., where the economy contracted at a 1 percent annualized rate in the first quarter, the Commerce Department reported yesterday. It marks the second straight quarter that Canada’s economy has outpaced the U.S.

The Canadian dollar weakened after the report, falling to 0.1 percent to C$1.0846 per U.S. dollar at 10:15 a.m. in Toronto. Bonds rose, with the yield on the 5-year government benchmark bond falling one basis point to 1.53 percent.

Rebound Expected

The Bank of Canada projects the world’s 11th-largest economy will recover in the second quarter and post above-2 percent growth through 2016, driven largely by a rebound in exports and a pick-up in business investment.

Still, today’s data show few signs businesses have much appetite to spend. Total business spending, including housing, is at the lowest since the final quarter of 2011, according to today’s data.

Business investment excluding housing fell by an annualized 2 percent, the biggest decline for that component since 2011. Businesses also drew down stockpiles of goods, acting as a drag on growth, Statistics Canada said.

“It’s obvious there is a clear disappointment” with business, said Mark Chandler, head of fixed-income research at RBC Capital Markets. “That part of it is still frustrating.”

While exports also dropped at an annualized 2.4 percent pace, the trade sector was the strongest driver of growth in the first quarter because imports fell by 7.2 percent.

A drop in imports adds to growth in GDP calculations. The gap between exports and imports has narrowed the past four quarters, today’s data show, showing that the trade sector is increasingly positive for growth.

Broad-based Slump

Canada’s first-quarter slump was broadly based and included contractions in investment spending by businesses and housing construction. Home building recorded its biggest quarterly decline since the recession, falling an annualized 6.3 percent, Statistics Canada said. So did final domestic demand, a measure that excludes the trade sector, which fell by an annualized 0.3 percent.

By industry, today’s data showed oil and gas was the biggest contributor to growth in the first three months of this year, with construction and services-related businesses such as wholesalers and retailers among the biggest drags. The public sector is also acting to slow growth as governments rein in spending in a bid to balance budgets.

Rate Announcement

The bank’s next announcement is June 4, and the rate will probably be unchanged for another year, according to economists surveyed by Bloomberg.

Gross domestic product must expand faster than a 1.9 percent rate to exceed the economy’s non-inflationary potential and reduce spare capacity, according to the central bank.

While consumer spending grew at an annualized 1.2 percent, that was the slowest pace in almost two years.

The quarter ended with a 0.1 percent increase for March that matched economist estimates.

Canada experienced colder than usual temperatures this winter, and its biggest city suffered through an ice storm in December that left thousands of people without electricity, hampering transport of goods and prompting companies to put off investments.

In a separate report, Statistics Canada said the industrial product price index declined 0.2 percent in April, and the raw materials price index rose by 0.1 percent. The median forecast of economists surveyed by Bloomberg was for increases of 0.4 percent and 0.5 percent respectively.

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