Slower-than-expected GDP growth in Canada

OTTAWA-

Economists say the Bank of Canada is still on course for another large rate hike on Wednesday after the latest data from Statistics Canada showed the pace of economic growth slowed in the first quarter.

The federal agency said on Tuesday that real gross domestic product grew at an annualized rate of 3.1 percent in the first quarter, helped by business investment and household spending.

The result was lower than an annualized rate of 6.6% in the fourth quarter of 2021, as export volumes fell 2.4% in the quarter, after two consecutive quarterly increases, due in part to the decrease in the trading of energy products.

Paul Ashworth, chief North America economist at Capital Economics, said growth for the first three months of the year was well below the consensus estimate, but broadly in line with the Bank of America’s April monetary policy report. Canada.

“The unexpected weakness in Q1 GDP growth was mainly due to a downward revision of January data, which now shows a 0.2% monthly decline, as Omicron-related restrictions had a larger impact. than previously thought,” Ashworth wrote in a report.

However, he said the real economy remains on solid footing, meaning the Bank of Canada can go ahead by raising its key interest rate by half a percentage point on Wednesday.

Economists expect the Bank of Canada to raise its key interest rate target by half a percentage point to 1.5 percent in its decision on Wednesday in an effort to curb inflation, which is at its highest pace in three decades.

The annual inflation rate reached 6.8 percent in April, its highest level since January 1991, while the Bank of Canada has a two percent target for the annual rate.

The central bank, which cut interest rates at the start of the pandemic, began raising its key rate earlier this year with a quarter point increase in March and another half percentage point in April.

The overall first-quarter growth came as the economy grew 0.7% in March and Statistics Canada said its preliminary reading for April shows the economy grew 0.2% in the month, but warned the figure will be revised. when you publish your official figure. on June 30.

RSM Canada economist Tu Nguyen said the lower-than-expected figures for the first quarter probably won’t change anything for the Bank of Canada because growth remains strong.

“And when we select the export figures in the first quarter, we see that domestic demand among businesses and consumers is still very strong, and I think that’s where the Bank of Canada bases its decision,” he said.

And Nguyen added that COVID restrictions have continued to loosen, so the services sector is likely to continue to recover as things return to full capacity.

The growth in the first quarter came as Statistics Canada said household spending rose 0.8 percent to mark a third consecutive quarterly increase.

Spending on durable goods rose 2.6% in the first quarter, helped by a 16.1% increase in spending on new passenger cars and a 3.5% increase on new trucks, vans and sport utility vehicles. However, Statistics Canada noted that despite the increases, auto spending remained below pre-pandemic levels as supply chain issues continued to hurt the auto sector.

Residential construction gained 4.3 percent as renovation spending rose 9.3 percent, resale costs rose 4.6 percent and new construction rose 0.2 percent.

Business investment in nonresidential structures rose 2.9 percent and investment in machinery and equipment rose 0.9 percent in the quarter, while spending on engineering structures rose 3.5 percent.

Statistics Canada also said employee compensation rose 3.8 percent in nominal terms for the quarter. Excluding the third quarter of 2020, it said it was the largest quarterly increase since the second quarter of 1981.

The agency said significant wage growth was seen across the economy, including professional and personal services, commerce, manufacturing, health care and social assistance, and construction industries.

Nguyen said the Bank of Canada will be concerned that higher wages could mean persistent inflation.

“That is not what the bank wants at all, so they will try to stymie that and control long-term inflation expectations,” he said.


This report from The Canadian Press was first published on May 31, 2022.

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