Canada Bids Farewell to Oil Shock With Its Economy on a Tear

  • Quarterly gain is one of the most broad-based since recession
  • Trade disappointment means growth comes in below forecast

If it wasn’t clear after the six-month run of strong economic data, the latest GDP numbers out of Canada confirm the country has bid adieu to its oil crisis.

The economy accelerated to a 3.7 percent annualized pace in the first quarter, following gross-domestic-product gains of 2.7 percent and 4.2 percent in the prior two periods, Statistics Canada reported Wednesday from Ottawa. That’s the strongest three-quarter gain since 2010.

It had been a tough ride, as the nation suffered through a once-in-a-generation collapse in commodity prices and one of its worst-ever economic performances short of a recession. Even now, the markets’ lackluster response to the news Wednesday -- the Canadian dollar fell -- underscore worries the country will struggle to find a new catalyst, especially once interest rates begin to rise from historical lows.

“Canada’s economy is humming along at a solid pace, and that has to be the lead for any story on the Q1 GDP numbers,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to investors. “Growth has left the earlier oil-price shock in the rear view mirror.”

Canada’s dollar, the worst performing major currency this year, fell 0.3 percent at 12:41 p.m. Toronto time Wednesday. Economists expected even stronger growth, with the median forecast in a Bloomberg survey coming in at 4.2 percent.

A report from the International Monetary Fund Wednesday highlighted the challenges, which have also kept the Bank of Canada on the sidelines even as the Federal Reserve has been raising interest rates.

The IMF estimates growth is on track to average 1.8 percent over the medium term. The Bank of Canada has also warned about Canada’s long-term potential growth, even as stronger growth this year cuts into excess capacity and diminishes the need for lower rates.

Economists forecast the Bank of Canada will start raising rates sometime next year.

Key Points

  • Canada’s indefatigable consumers, benefiting from a buoyant jobs market and rising home values, continue to be key drivers. Household final consumption expenditure rose at an annualized 4.3 percent annualized pace in the first quarter. That’s the fastest since 2010.
  • The housing booms in Toronto and Vancouver are fueling residential investment, which was up 15.7 percent on an annualized basis in the first quarter. That’s the biggest gain since the first quarter of 2012.
  • Business investment made a comeback in the first quarter. Investment in non-residential structures, along with machinery and equipment, posted only its second quarterly gain since 2014, growing an annualized 10.3 percent. The increase was the largest since 2012.
  • All major components of domestic demand increased in the first quarter -- the first time that’s happened since 2010.
  • During the month of March, Canada’s economy grew at a more-than-expected 0.5 percent pace on the back of higher manufacturing, more than double the 0.2 percent pace estimated by economists.

Questions Remain

  • There was a big jump in inventories, which turned out to be the biggest contributor to growth -- worth 3.6 percentage points. That may not bode well for the future if businesses decide to pare down those inventories
  • The pick-up in consumption is being financed by a reduction in the household savings rate, which fell to 4.3 percent in the first quarter, a two-year low.
  • Residential investment may have hit its high water mark as tougher regulations and new taxes kick in. At 7.1 percent of GDP, residential investment is the highest since 2006 and nearing its late 1980s record of about 8 percent.
  • Exports disappointed, with a negative annualized reading of 0.3 percent in the first quarter. Combined with a surge of 13.7 percent in imports, the trade sector was a major drag on growth. That means the expansion is totally reliant on domestic demand -- business, consumer and government spending -- which was up an annualized 4.7 percent in the first quarter.
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