Canadian economy shows promising growth in Q1 2017, say economists

A drop in net exports in Q1 2017 restrained overall economic growth | Shutterstock

Canada’s GDP increased 3.7% on an annualized basis in 2017’s first quarter, according to Statistics Canada data released May 31.

This increase was below the consensus call of 4.2%, but economists are still saying the latest data is cause for optimism in Q2. It could also bee seen as a step in the direction toward a Bank of Canada rate hike.

The growth was driven in large part by a 4.7% annualized increase in final domestic demand; this was the highest increase in this area in seven years. Business investment increased 10.3% at an annualized rate (a.r.), housing grew 15.7% and consumer spending jumped 4.3%.

Growth was restrained by a drop in net exports. Services exports fell 0.5% in the quarter, and goods exports remained unchanged, with declines in aircraft and other transportation equipment and metal ores being partially offset by an increase in motor vehicles and parts. Imports of goods and services increased 3.3% in the quarter.

Nathan Janzen, RBC senior economist, said although there are still plenty of risks going forward, particularly due to the possibility of trade disruptions with the United States, he pointed out the data shows business investment is rising, which means “those concerns will have to be balanced against firmer current economic conditions that argue that ultra-low levels of interest rates may otherwise no longer be needed.”

In a note to investors, he said, “We expect the bank to maintain a very cautious tone in the near term, reflecting uncertainties about the U.S. and the lack of evidence that consumer price inflation is strengthening, but assume that further economic growth will eventually prompt the central bank to begin hiking rates at a gradual pace by mid-2018.”

BMO chief economist Douglas Porter said he now expects Q2 growth to be 2.4%, up from a previous forecast of 1.6%. Annual growth is now forecast to be 2.7%, up from 2.5%. This would be the highest increase since 2011 and higher than the Bank of Canada’s call of 2.6%.

Porter pointed out gains were more widespread and solid than anticipated.

“It’s rare that a 3.7% headline GDP growth doesn’t impress, but that speaks to the super-hot expectations leading into today’s figure,” he said. “Overall, while market reaction has been muted to say the least, we find this an impressive display of power by the previously struggling Canadian economy.”

The Canadian dollar displayed the muted reaction Porter mentioned, falling more than three-tenths of a cent to 74.05 cents U.S. as of press time.