Economic analysis

Stephen Poloz nails 'atrocious' prediction for first quarter

Bank of Canada governor was on the nose with earlier prediction of bleak Q1 results, driven by collapse in oil prices

(Justin Tang/CP)

(Justin Tang/CP)

OTTAWA – When Bank of Canada governor Stephen Poloz veered off script earlier this year to deliver a stunner that Canada’s first-quarter numbers would look “atrocious” — he wasn’t kidding.

The sharp collapse in oil prices, and the failure of other sectors to pick up the slack, helped push the economy into reverse over the first three months of the year, Statistics Canada said Friday.

The country’s real gross domestic product for the first quarter shrank by 0.6 per cent at an annualized rate. The number rang in below expectations, marking the first time the GDP growth rate slipped under zero since the fourth quarter of 2011.

It was also the deepest Canada’s real GDP plunged into negative territory in nearly six years, when it fell by 3.6 per cent during the recession-battered second quarter of 2009, Statistics Canada said.

The dismal report threatens to echo in the federal political realm, since it comes less than five months before voters are scheduled to go to the polls. The economy remains an ever-important ballot-box issue.

Officials, however, had cautioned Canadians to brace for a rough economic ride in the early months of 2015.

Poloz shocked observers in March when he warned, in a Financial Times interview, that the oil-price plunge would make Canada’s first-quarter numbers look “atrocious.”

He later downgraded his GDP growth projection for that period to “zero per cent.”

The headline GDP figure released Friday turned out to be even worse.

“The data is terrible,” said Krishen Rangasamy, senior economist at National Bank of Canada.

Sifting through the underlying numbers, Rangasamy could find only the rare bright spot.

He said there were few signs of the economy’s long-awaited turnaround, a pickup many expected would receive boosts from a weaker dollar, cheaper pump prices and low interest rates.

Related: The A to Z of the oil crash

Economic activity decreased in several categories, including business investment, exports, construction and — most of all — the important resources sector, which sank 2.7 per cent compared to the previous quarter.

Exports, an area experts predict will benefit from the lower loonie, dropped 0.3 per cent — its second straight quarterly contraction.

Household spending, another category expected to accelerate thanks in part to the more-favourable borrowing environment, only inched upwards by 0.1 per cent. It was the slowest growth in consumption in nearly three years.

Rangasamy was encouraged that consumers’ real disposable income climbed by 6.2 per cent in the first quarter — the best since 2010. He predicted people should be ready to spend more in the second quarter after saving their pennies over the harsh winter.

He also thinks one of the big factors behind the 0.8-per-cent drop in manufacturing — auto sales — was a temporary setback as Ontario plants closed for retooling.

Looking down the road, however, the disappointing contraction of 0.2 per cent for the month of March — also included in Friday’s report — suggests a slow start to the second-quarter period.

Poloz has expressed cautious optimism for a 1.8-per-cent second-quarter rebound. “We’ve got our fingers crossed,” he said in March of second-quarter growth.

BMO chief economist Doug Porter said Friday that the March decrease may have been the biggest “unwelcome” surprise in the data.

He said the new numbers, combined with the expected economic impact of the Alberta wild fires, led BMO to chop its second-quarter GDP forecast Friday to just 0.5 per cent — down from two per cent.

BMO’s overall 2015 projection has been shaved to 1.5 per cent, which he said would be the slowest growth for Canada — outside of recession — in at least the past three decades.

The Bank of Canada has pinned its hopes for a turnaround on U.S. demand, which is still predicted to rise despite a slowing of the American economy in recent months.

However, fresh data released Friday showed the U.S. economy shrank in the first quarter, contracting at an annual rate of 0.7 per cent.

“As recently as six weeks ago, few would’ve believed that the U.S. growth numbers would look even weaker than Canada,” said Porter, who believes Poloz could lower the overnight interest rate again if the second quarter turns out to be a big disappointment.

Canadians won’t know the second-quarter GDP numbers until their release in late August — less than two months before the Oct. 19 federal election date.

With the vote on the horizon, the Harper government came under attack Friday by its political opponents.

New Democratic MP Guy Caron said in a statement that the numbers were proof the Conservatives had “seriously mismanaged” the economy.

Ralph Goodale, a Liberal MP and former finance minister, accused the Tories of putting “all of their eggs in one particular basket” — the energy sector. Goodale said they should be putting more focus on other industries as well.

Finance Minister Joe Oliver was not available for comment.


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