Canadian consumers were reaching the limits of what they could borrow and spend even before Europe's escalating crisis and a faltering labour-market recovery in the United States rattled markets and sapped confidence, pointing to weak growth ahead.
Figures Friday from Statistics Canada show the economy grew at a 1.9-per-cent annual pace from January through March, much less than the Bank of Canada was expecting, as consumer spending and total domestic demand both grew at the slowest pace since 2009.
Consumption slowed to a 0.9-per-cent annual rate, from a 2.8-per-cent pace in the last three months of 2011. Final domestic demand – which includes consumer spending but also areas like business investment and government expenditures – slowed to a 1.3-per-cent pace from 1.6 per cent. The personal savings rate fell to 2.9 per cent, suggesting Canadians are funding some of their purchases by dipping into savings, which is clearly not sustainable.
Trade, which was expected to contribute to gross domestic product growth in the quarter, was a slight drag. Business investment rose, but the worsening global backdrop suggests companies will hunker down and wait things out before hiring or investing much more.
"Nobody wants to be caught short in making major expansion plans or major investments in inventory or major investments in new equipment, or in employment, if they don't see things trending upward," said Jay Myers, president and chief executive officer of Canadian Manufacturers & Exporters. "We're almost back to where we were last summer, with all of the uncertainty coming out of Europe driving volatility in currency markets, commodity markets, you name it."
And the economy grew just 0.1 per cent in March, partly because of temporary factors like maintenance shutdowns in the oil and gas sector, but still a sign of underwhelming momentum.
No wonder that many investors in markets tied to interest-rate levels have done a 180-degree turn, betting Friday that Bank of Canada Governor Mark Carney, whose next decision is Tuesday, will cut borrowing costs before the end of the year to lean against the Europe-fuelled malaise.
Some aren't buying it. Avery Shenfeld, chief economist at CIBC World Markets, has always been on the "dovish" side, maintaining that the central bank might not be able to raise interest rates before late next year, or even into 2014. But even Mr. Shenfeld says rate cuts are a stretch, given Mr. Carney's worries about household debt levels and strong employment gains in March and April.
"Concerns about low-for-long side effects will have [Mr.]Carney hanging on to the view that, while its timing has been waylaid, the next move will be a hike."