Senior Director of Canadian Economics
Canada: Q1 GDP Shows You Can’t Keep a Good Consumer Down
- Real GDP rebounded strongly in the first quarter of 2023, coming in at 3.1% annualized following a slight negative print in Q4 2022. This was modestly better than our call but well above those of the Bank of Canada and the consensus of economic forecasters.
- Domestic demand advanced by 2.6% annualized in Q1, after contracting in the prior quarter. Household consumption underpinned the rebound (5.7%), as delivery of autos ordered during the pandemic pushed durable goods consumption higher (14.0%). Other consumption categories also gained ground, notably services (5.3%).
- In contrast but as expected, residential investment contracted again in the first quarter, falling 14.6% for the fourth consecutive quarterly decline. At the same time, non-residential business investment moved higher in the month (1.9%), as investment gains in non-residential structures (8.7%) and intellectual property (19.3%) more than offset a contraction in machinery and equipment (-9.6%).
- Trade and inventory data continued to experience volatility in Q1. Indeed, net exports contributed 3.0 ppts to growth in the first quarter, almost entirely due to a 12.7% expansion in real goods exports. As real exports and domestic demand advanced, inventories were naturally drawn down significantly. The result was a 2.4 ppts drag on Q1 growth, following a near-record 5.7 ppts drag in Q4.
- In nominal terms, GDP rose by 4.2% in Q1 as prices edged higher after two consecutive quarterly declines. Terms of trade dropped by 10.2% thanks to still-lower commodity prices in Q1. That hit corporate profits (net operating surplus), which fell by 15.4%. In contrast, compensation of employees rose 7.2% in Q1, the largest quarterly gain since the first half of 2022. But that wasn’t enough to offset the 8.6% increase in nominal consumption. Consequently, the savings rate fell from 5.8% in Q4 2022 to 2.9% in Q1—the lowest level since before the pandemic.
- Monthly real GDP was flat in March, matching our call but besting consensus and Statistics Canada’s flash estimate of -0.1%. Statistics Canada’s flash estimate is for a 0.2% increase in April 2023, which looks unaffected by any economic drag from the ice storms in Central Canada and federal public service strike. Assuming flat real GDP growth in May and June, this would put Q2 growth in real GDP by industry at 0.9% annualized.
Q1 real GDP growth outperformed the Bank of Canada and consensus calls, underpinned by broad-based strength in the quarter. Further, the data so far in April suggest the second quarter of 2023 could come close to the 1.0% annualized advance the Bank of Canada projected back in April. Indeed, while we pencilled in a flat print in our recent Economic and Financial Outlook, the flash estimate for April suggests it could come in stronger.
For the Bank of Canada, this is the just the latest data point reinforcing the strength of the Canadian economy, particularly the consumer. While we’ll get more information at next week’s rate announcement, we think today’s data substantially increases the odds of another rate hike.
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