Forget those thoughts that the Bank of Canada might turn more hawkish on its interest rate outlook. Canada's first-quarter gross domestic product report is a veritable playground for rate-policy doves.
Almost nothing in this report, released this morning by Statistics Canada, is encouraging. First-quarter GDP was up a thin 1.2-per-cent-annualized rate, the slowest growth since the 2012 fourth quarter. Disturbingly, final domestic demand (the combination of personal spending, government spending and business investment) fell 0.1 per cent – its first decline since the Great Recession, and its first decline outside of a recession in nearly 20 years.
Household consumption grew at its slowest pace in a year. Business fixed-capital spending slumped 0.9 per cent, including a 1.6-per-cent decline in residential structures and a 0.5-per-cent drop in plant-and-machinery investments. Government consumption fell 0.1 per cent. Exports fell 0.6 per cent.
About the only bright light was mining and oil and gas extraction, which jumped 2.4 per cent in the quarter and contributed mightily to the export totals. Without a rebound in commodities, these numbers could have been even worse.
Not only was the first quarter slower than the Bank of Canada's modest expectation of 1.5-per-cent growth, but the two factors the central bank has repeatedly identified as critical to its growth outlook – exports and business investment – took a convincing step in the wrong direction. A stronger GDP result, with meaningful improvements on these two fronts, might have caused Stephen Poloz and company to reassess their position that interest rate increases are still a long way off – especially given the recent faster-than-expected acceleration in Canadian inflation. But the evident lack of underlying economic momentum will almost certainly be enough for central bankers to look past the inflation numbers – which the bank considers to be a largely transitory energy-and-currency-fuelled blip anyway.
There is some small solace in the fact that, as poor as the first-quarter numbers are, a 1.2-per-cent growth rate looks pretty darned good next to the United States' 1-per-cent contraction in its first quarter (reported on Thursday). And to some degree, Canada's weaker-than-expected first quarter can be blamed on the lousy quarter our neighbour and biggest trading partner delivered.
But that does little to explain the substantial weakness in domestic demand. The only reason trade contributed positively to first-quarter growth was because imports (down 1.9 per cent) fell even further than exports did.
The next apparent scapegoat was the miserable and stubbornly long-lived winter, which was identified as the culprit in the U.S. slowdown (and, indeed, has been blamed for pretty much every disappointing economic indicator since the start of the year). It probably was a factor in things like retail sales, residential construction and exports to the United States. But it would be a mistake to dismiss Canada's first-quarter sluggishness (which, I might add, is based on seasonally adjusted data) on the weather to the same degree the U.S. slump has been; as Bank of Montreal chief economist Doug Porter noted, "Canada is a bit more used to winter and is better equipped to deal with its charms."
Most economists are saying that the first-quarter stumble wasn't that far from the relatively slow pace the Bank of Canada expected anyway, and shouldn't set back its forecast growth trajectory meaningfully. But by the same token, it also suggests there's not enough economic momentum to sustain the recent inflation spike. Expect the Bank of Canada to tell us exactly that when it issues its policy statement next week – and to continue signalling that interest rate hikes are probably more than a year away.