Canada's first-quarter economic growth number didn't quite live up to advance billing, but make no mistake: The country's economy has shaken off its oil-shock yoke and set itself on a world-class roll.
Statistics Canada's gross domestic product report showed that real GDP (i.e. excluding inflation) grew at an annualized pace of 3.7 per cent in the quarter – a disappointment only because expectations had gone sky-high amid a raft of recent strong economic indicators. The median estimate among economists was 4.2 per cent, which would have contended for the fastest-growing quarter in more than five years.
Instead, we settled for merely a run-of-the-mill excellent quarter.
It was, however, enough to rank Canada as the fastest-growing economy in the G7 in the first three months of the year. Canada was also the fastest-growing G7 economy in the previous quarter. And the quarter before that.
After languishing below the G7 average for the better part of two years as the economy struggled to rebuild from the collapse in oil prices that decimated one of its biggest industries, Canada has emerged as a growth leader among major advanced economies.
This no longer looks like a mere bounce-back from a rough first-half of 2015, and the severe but temporary impact of the Fort McMurray wildfires. This looks like an economy that has quite definitively turned the corner.
"Growth has left the earlier oil-price shock in the rear-view mirror," Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a research report. "We're making solid progress in eliminating earlier disinflationary slack and getting back to full employment. We're back."
Even the apparent disappointment in first-quarter growth came only because Statscan also revised upward its GDP estimates for the previous two quarters. After the revisions, GDP is pretty much right where the experts thought it would be at the end of the first quarter – which is to say, pretty darned warm. Over the past three quarters, the economy has grown by an average of 3.5 per cent annualized.
This has put the economy considerably farther down the road to full recovery than experts envisioned just a few months ago. In January, the Bank of Canada estimated fourth-quarter GDP growth of 1.5 per cent annualized, and projected first-quarter growth of 2.5 per cent. Statscan's data now put each of those quarters more than a full percentage point above those targets. The federal government's budget, issued two months ago, forecast growth for all of 2017 of 1.9 per cent; some economists on Wednesday were talking about something north of 2.5 per cent.
Part of the reason for that optimism was the economy's performance in March. The monthly GDP figures, released at the same time as the quarterly numbers, put month-over-month growth at a brisk 0.5 per cent, well ahead of economists' expectations. That means the economy entered the second quarter at a faster pace than economists had baked into their forecasts – which sets the quarter up for stronger growth than economists have projected.
And the March gains were remarkably broad-based: 16 of 20 industries posted growth in the month. The economy might not be firing on all cylinders, but it's getting close.
That said, no one expects the economy to keep humming along at a 3.5-per-cent growth pace. For a developed economy with an aging work force, anything north of 2 per cent is considered impressive; north of 3 per cent is downright torrid. And indeed, there were elements of the first-quarter report that suggest a moderation is in the cards for the second quarter.
Notably, a large part of the quarterly growth was fuelled by a $12.2-billion build-up in business inventories, the biggest quarterly increase in two years. That suggests that manufacturers were stockpiling output rather than selling it – which often signals a slowdown in production in the subsequent quarter, as businesses rely on their inventories to fill customer orders.
Economists also pointed out that a fire-related shutdown of a Suncor oil sands facility in Alberta for all of April will take a bite out of economic output in the second quarter. Quebec's brief construction strike may have a smaller impact.
But those are temporary delaying factors in what looks like an increasingly sustainable economic expansion. Crucially, the first quarter showed a rapid acceleration in business investment – the one critical element of Canada's recovery that had been missing since the oil shock hit at the end of 2014. Business investment in machinery and equipment, a key indicator of business expansion, soared at an annualized rate of 23 per cent in the quarter, an encouraging signal for hiring and growth in coming quarters.
One big beneficiary of this better-than-expected economic growth could be Canada's government finances.
Bank of Montreal chief economist Doug Porter said that thanks to a combination of better-than-expected real growth and price increases for Canadian goods, nominal GDP – the version of growth that includes inflation, the more indicative figure for government revenues – looks on track to grow by nearly 6 per cent this year, far ahead of Ottawa's budget forecast of 4.1 per cent.
The government indicated in the budget that a one-percentage-point change in one-year nominal GDP growth would affect its bottom line by about $4.7-billion; if nominal GDP comes in at the pace Mr. Porter suggested, the result could shrink the government's projected $28.5-billion deficit by roughly one-third.