There's no question that the Canadian economy got off to a strong start in 2016. But as the first-quarter growth figures roll out this week, the focus will be less on what the economy did for us in the quarter than what it has done for us lately. Which, frankly, isn't much.
Economists estimate that thanks to a red-hot start (a 0.6-per-cent growth spurt in January alone), the economy was able to coast to an estimated 2.8-per-cent annualized growth rate for the quarter as a whole. That would be its strongest performance in more than a year, and more than triple the fourth quarter's 0.8-per-cent pace.
A key to the first-quarter performance was a surge in export volumes, which grew at an annualized rate of more than 8 per cent. The continued buoyant housing market and healthy consumer demand should also provide solid contributions to the quarter's growth, economists said.
But the first-quarter spurt will matter less to economists than just how badly growth sputtered to the end of the quarter – which set the momentum, or lack thereof, that the economy has carried into what is shaping up as a much rougher second quarter. A string of discouraging economic reports for March released earlier this month – including a sharp drop in exports, as well as declines in wholesale and retail sales – has led economists to estimate that the economy was probably flat, at best, in the month. A small decline is a distinct possibility, compounding the 0.1-per-cent dip in February.
"Don't be fooled by the big Q1 [growth figure], as momentum ebbed sharply after January," Bank of Montreal economist Benjamin Reitzes said in a report.
This fizzling has led many economists to suggest that demand got ahead of itself in late 2015 and the start of 2016, perhaps pulled forward by an unusually mild winter in many key regions. We may now be suffering from the hangover from that overexuberance, in what is shaping up as a pronounced time-out in the second quarter. That loss of momentum has been exacerbated by the devastating Alberta wildfires, which have put a huge dent in economic activity surrounding the province and its massive oil sands industry. Last week, the Bank of Canada estimated that the impact from the natural disaster will shave about 1.25 percentage points off the annualized GDP growth rate in the second quarter – which, given the weak momentum even before the fires hit, suggests the economy may well shrink slightly in that period.
One factor of particular concern has been the country's export performance, which is considered a critical element to the economy's recovery this year, but has been inconsistent for months. After growing strongly in December and January, exports gave back those gains in February and slumped badly again in March, down 4.8 per cent. This came amid sluggish growth in the U.S. economy, by far Canada's biggest export market. U.S. gross domestic product grew a thin 0.8 per cent annualized in the first quarter, according to revised U.S. government GDP estimates released last week.
"This abrupt deterioration in [export] momentum into Q2 preceded the wildfires by over a month," Bank of Nova Scotia economist Derek Holt said in a research note. The wildfires "will only further damage Canada's exports through disrupted energy production," he said.
One positive, though, is evidence that the U.S. economy has bounced back: Forecasters believe U.S. GDP is on track for about 3-per-cent annualized growth in the second quarter. That could start to show up in a bounce-back in exports in the April merchandise trade numbers, which come out this Friday and which predate the wildfire disruptions.
Still, economists say the biggest impediment to growth – particularly in Canada's domestic market, but also to an extent in its U.S. exports – is the depressed state of business investment.
On the export side, sluggish U.S. business investment has been restraining demand for Canadian building materials and industrial machinery and equipment. Tepid corporate profits suggest U.S. companies may continue to be conservative with their spending in the second quarter, if not beyond.
An even bigger issue is the deep investment slump in Canada, especially from the beleaguered oil patch. It will be a large negative once again in the first-quarter GDP numbers, with economists estimating that spending dropped by about 10 per cent. Statistics Canada's recent survey of business investment intentions suggested that companies plan to watch their purse strings closely this year, especially among resource producers and manufacturers. That will continue to put a dent in the economy's growth prospects, economists said, although infrastructure spending from the federal government will fill part of that spending void later this year.
"Business investment intentions suggest that the private sector is in no rush to expand capacity," CIBC World Markets economist Nick Exarhos said in a report.