OTTAWA — Canada’s pace of economic growth slowed in the first quarter to its lowest rate in nearly two years, but the weaker-than-expected data did little to tamp down economists’ predictions of an interest rate hike later this year.
Statistics Canada said Thursday the economy grew at an annualized pace of 1.3 per cent for the first three months of the year, slower than the annual pace of 1.7 per cent in the final three months of 2017. Economists had expected growth to come in at an annualized rate of 1.8 per cent for the first quarter of 2018, according to Thomson Reuters Eikon.
The slow start to the year was largely attributed to a pull back in the real estate market amid new mortgage stress test rules and a cooling housing market. The 1.9 per cent drop in housing investment was the largest decline since the first quarter of 2009.
However, economists pointed to the strong growth in March to end the quarter and suggested the report did little to change expectations for an interest rate hike by the Bank of Canada as early as July.
“While the headline quarterly GDP result was a bit disappointing, even to those of us who were on the low side of consensus, the recent robust monthly readings and the strength in business investment provide a nice counterweight,” Bank of Montreal chief economist Doug Porter wrote in a report.
“The main point is that growth for the full year still looks on track to come in around two per cent, which is very much in line with what the Bank of Canada has been expecting.”
Porter noted that the economy posted growth of 0.3 per cent in March, the final month of the quarter, helped by the mining and oil and gas sector and gains in both wholesale and retail trade.
“The sturdy March result provides a nice hand-off for Q2,” he said.
The growth rate of 1.3 per cent for the first quarter matched the Bank of Canada’s forecast in its April monetary policy report.
The central bank elected to keep its key interest rate on hold Wednesday, but raised expectations that rate hikes are coming when it dropped a reference to remaining “cautious.”
Economists interpreted the change as a signal that the next rate increase would be sooner rather than later.
Their rate-hike expectations largely remained in tact even as Thursday’s report showed the rate of growth for real gross domestic product in the first quarter was the slowest since the economy contracted in the second quarter of 2016.
Growth in that quarter was affected by forest fires that destroyed parts of Fort McMurray, Alta., and forced the shutdown of several oilsands operations in the region.
The most recent GDP report showed household spending increased 0.3 per cent, the slowest pace since the first quarter of 2015, while household spending on services increased 0.5 per cent and spending on goods was unchanged.
Growth in export volumes slowed to 0.4 per cent compared with one per cent in the fourth quarter of 2017. The gains were mainly contributed by crude oil and bitumen and the export of services. Imports rose 1.2 per cent in the quarter.
Business investment in machinery and equipment rose 4.2 per cent, while intellectual property products rose 3.3 per cent.
Beneath the weaker-than-expected first-quarter growth figures, the report included “some relatively encouraging details,” said TD Bank senior economist Brian DePratto.
“Business investment continued to climb, partially offsetting the more modest pace of consumer spending. Income gains also remained solid,” DePratto wrote in a report.
“Plus, March’s solid monthly performance indicates that momentum continued to build through the quarter, setting the Canadian economy up for an acceleration in output in Q2.”
DePratto said the Canadian economy “clearly still has some gas left in the tank” and that he expected conditions will stay supportive of a Bank of Canada hike at its next meeting.
Looking back at 2017, Statistics Canada revised its real GDP numbers upward for the second and third quarters.
For the second quarter of 2017, the estimate for the annualized growth rate was increased to 4.6 per cent compared with a March estimate of 4.4 per cent, while the estimate for the third quarter was increased to 1.7 per cent from 1.5 per cent.
Craig Wong, The Canadian Press