Winter may finally be over on our calendars, but not so for impending Canadian and U.S. economic indicators. Abysmal weather almost certainly put a chill on first-quarter economic activity, but that could clear the way for a heat wave of growth in the next couple of quarters – just as it did last year.
As a growing number of disappointing economic indicators rolls in, a common theme has emerged from the analysis: Blame the cold. Last week, it was U.S. housing starts and industrial production, and Canadian manufacturing. The week before, it was U.S. retail sales and Canadian housing starts. All appear to have gotten buried in a snowdrift – and all point to disappointingly slow Canadian and U.S. economic activity in the first couple of months of the year.
Economists have been scaling back their first-quarter gross domestic product forecasts accordingly. In Canada, the pundits are saying we'll be lucky to meet the Bank of Canada's forecast of a 1.5-per-cent annualized growth pace. In the United States, economists have been cutting their growth estimates to something south of 2 per cent as the weak numbers pile up.
If this sounds familiar, it's because we heard a lot of the same thing last year, when a brutal winter put the North American economy in a deep chill. Canada's economy expanded by a thin 1-per-cent annualized rate in the 2014 first quarter; the U.S. economy actually contracted significantly, by 2.9 per cent.
But remember how that played out? When the weather turned, both economies played catch-up in a big way.
The U.S. rocketed to annualized growth of 4.6 per cent in the second quarter and 5 per cent in the third, releasing all that economic energy that was pent up over the winter. Canada's growth was 3.8 per cent in the second quarter and 3.2 per cent in the third – less spectacular than the U.S. rebound, but still well above long-term trend growth.
Could we be due for a repeat this year? Absolutely – at least in direction, and perhaps even in scale.
As cold as last year's winter was, this year's has been even colder. January and February of 2015 had a higher number of heating degree days (the sum of the number of degrees below 18 C for each day) than the same period in 2014, in both the United States and Canada. Even as economists have scaled back their first-quarter growth expectations, they have expressed confidence that the sluggishness is temporary and anticipate a bounce-back to come.
Even without the weather effects, economists had been expecting both the Canadian and U.S. economies to pick up momentum as the year progresses. Canadian growth in the second half of the year is expected to be north of 2 per cent, while U.S. growth is projected around 3 per cent. But with the weather having apparently delayed economic activity early in the year, the potential for even faster growth in subsequent quarters now looks to be in place as pent-up demand from winter gets released.
In Canada, the weather-related slowdowns are exacerbated by the impact of the oil shock, which had already been expected to have a temporary but profound drag on economic growth. In its previous rate-decision statement, the Bank of Canada suggested that it expected oil's impact to be "front-loaded" – implying a bigger slowdown in the first quarter, followed by a bounce-back in the second.
That says a couple of encouraging things about the Canadian economy. For one, even with a double-whammy from oil and the weather, most economists still expect positive growth, most likely exceeding last year's pace, in the first quarter. The momentum the economy has gained on the non-energy trade front, with a big assist from a depleted Canadian dollar, is expected to help the economy ride out its first-quarter rough patch. Second, the weather impact could well mirror that of oil – which could provide considerable juice for a resurgence in the second and third quarters.
Just how much of a resurgence is hard to say; a lot depends on how long the oil shock weighs on the broader economy, and a lot of that depends on where oil prices go from their current near-lows. But it's worth noting that while the economists have been baking weather-related sluggishness into their first-quarter GDP estimates, for the most part they haven't yet factored a post-winter bounce into their second-quarter numbers. We could be headed for much warmer, sunnier numbers once we put another forgettable winter behind us.