Economic analysis

Econo-metrics: The (almost) monster first quarter GDP

Canada’s economy is still being driven by consumption, but there are hopeful signs that businesses are finally starting to invest again
Sold stickers on real estate signs along Beach Drive in the greater Victoria Municipality of Oak Bay, Victoria, BC. (Don Denton/CP)
Sold stickers on real estate signs along Beach Drive in the greater Victoria Municipality of Oak Bay, Victoria, BC. (Don Denton/CP)
(Don Denton/CP)

Here is the headline: Canada’s gross domestic product accelerated to an annual rate of 3.7 per cent in the first quarter, as Canadians kept shopping and companies rebuilt inventories, Statistics Canada reported May 31.

StatsCan raised its growth estimates for the previous two quarters, to 2.7 per cent and 4.1 per cent, respectively, suggesting Canada is experiencing its strongest stretch of economic growth since at least 2013. That’s welcome news, but one month doesn’t make a trend. Canada’s economy sputtered for much of 2015 and 2016, posting small quarterly declines in three of six quarters through the second half of last year. Nevertheless, we can take comfort that GDP now has grown at an average annual rate of 3.5 per cent over the past three quarters, matching the average quarterly rate in 2013.

Glass half full: Business investment in machinery and equipment surged 5.8 per cent, the biggest quarter-to-quarter increase since the first half of 2011. It is important to avoid putting too much emphasis on one reading, but a pop that big could signal Canadian companies are getting over the crisis of confidence that has kept them from spending money for much of the past few years. Investment is key to creating the momentum necessary to keep Canada growing at a pace that will lower the unemployment rate.

Here’s a snapshot of the contribution of business investment in non-residential structures and machinery equipment to quarterly annualized growth since the start of 2006.


Glass half empty: Exports declined modestly from the fourth quarter. That’s disappointing because the Bank of Canada is counting on international shipments and business investment to take over from household consumption and real estate as the country’s primary growth engines. The economy needs that rotation because consumers have piled on too much debt to carry on spending like they have been in recent years. Wages and salaries grew one per cent in the first quarter, slower than inflation. Household expenditure increased 1.4 per cent, yet disposable income rose only 0.4 per cent so few of us are going to feel richer and start spending freely.

Bottom line: The buzz on Bay Street before the latest GDP numbers was that the annual growth rate might have been faster than 4 per cent in the first quarter. Some said we’d grow more than 5 per cent, which is starting to sound like something you’d only hear from China or India. The slower pace should quiet the critics who say the Bank of Canada has fallen behind the curve and should be raising interest rates. (The central bank predicted in April that the economy grew 3.8 per cent in the first quarter.) Exports likely suffered from surprisingly weak demand in the United States at the start of the year and should recover. Still, growth most likely will cool over the rest of the year. There are early signs the housing bubbles in Vancouver and Toronto may have peaked, which will curb consumption. Canada’s rebound from the collapse of oil prices looks secure, but the central bank can safely leave interest rates low for some time yet.