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Canada’s economic growth slowed in the first quarter of 2022, but an acceleration in demand showed why the Bank of Canada is unlikely to deviate from its course of rapid interest rate hikes.

After adjusting for inflation, gross domestic product grew at an annualized pace of 3.1 per cent, slowing from 6.6 per cent in the fourth quarter of 2021, Statistics Canada said on Tuesday. While that growth was in line with the central bank’s expectations, it fell short of the median estimate from Bay Street analysts, who called for growth of 5.2 per cent.

The weak spot in Tuesday’s report was international trade, with both exports and imports falling. However, economists were largely upbeat about other details – notably, that consumers and businesses are continuing to spend amid sky-high inflation. Final domestic demand rose 4.8 per cent on an annualized basis, with hefty gains in household spending, business investment and purchases of residential real estate.

The Canadian economy also held up better than other major economies during a first quarter that was jolted by the Omicron variant of COVID-19. For instance, the United States and Japan posted GDP declines at the outset of the year, while growth was muted in the euro zone.

“The relative resilience of the Canadian economy in the quarter may be a broader theme for 2022, aided by its heavy commodity component and a greater capacity to rebound in the service sector following two years of heavy restrictions,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.

Financial analysts said the GDP report was unlikely to redirect the Bank of Canada from its quickest pace of policy tightening in decades. The central bank is widely expected to hike its benchmark interest rate by half a percentage point on Wednesday, taking that rate to 1.5 per cent, as part of its bid to slow inflation, which recently hit a 31-year high of 6.8 per cent.

The bank’s policies are “now geared almost exclusively on scalding inflation – so a modest growth miss is not going to divert coming rate hikes one iota,” Mr. Porter added.

In various respects, the Canadian consumer appears to be in good shape. Compensation of employees rose 3.8 per cent in the first quarter in nominal terms, following a 2-per-cent rise in the fourth quarter. It was the largest growth in compensation since 1981, excluding the third quarter of 2020, when the country was rebounding from the first wave of COVID-19.

Canadians also hung on to more of their money. The household savings rate rose to 8.1 per cent of disposable income from 6.9 per cent – and far above the quarterly average of 3.4 per cent during the 2010s.

Households have amassed a bulk of savings during the pandemic, particularly those in higher income brackets, and that’s helping them to continue spending amid lofty inflation. Household spending rose at an annualized rate of 3.4 per cent, with strong purchases of durable goods.

The flip side is that, because people are able to keep spending, that’s helping to fuel the rapid climb in consumer prices. After Wednesday’s rate decision, several analysts expect the Bank of Canada to hike by another half a percentage point in July – a rapid pace of increases that some households could struggle to adapt to.

This cycle of monetary policy tightening has already led to weaker sales and falling prices in many of Canada’s exuberant housing markets.

However, that shift hadn’t yet materialized in Tuesday’s GDP report. Investment in residential real estate jumped by 18 per cent, on an annualized basis, driven by expenditures on renovations and costs associated with home purchases.

“Another large positive contribution from residential investment clearly won’t be repeated,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a client note.

While trade slipped during the opening months of 2022, Canada’s terms of trade – the ratio between the price of exports and imports – jumped to a record high, owing to the recent surge of commodity prices, such as crude oil and lumber.

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