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Canada’s slow-but-steady economy expected to outpace U.S. in first quarter

Cold and stormy winter weather affected everything from home building to consumer spending and exports, but the rest of the year is likely to be better.

J.P. MOCZULSKI/The Globe and Mail

It's not much of a consolation, but Canada's plodding economy looks like it outperformed the U.S. in the first quarter.

Figures due out Friday are expected to show that U.S. gross domestic product shrunk at an annual rate of as much as 0.5 per cent in the first quarter.

Forecasts suggest Canadian GDP, on the other hand, grew 1.7 per cent – still positive, but a dramatic slowdown from the 2.9 per cent pace of the final three months of 2013. That report is also due out Friday.

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The big story in both countries was the cold and stormy winter weather, which affected everything from home building to consumer spending and exports.

The rest of the year is likely to be better, but nowhere near the near-3-per-cent pace of the final quarter of last year. And few economists expect Canada to grow faster than the U.S. through the rest of the year.

Bank of America Merrill Lynch economist Emanuella Enenajor is forecasting growth in Canada of 2 per cent or less throughout 2014. She said exports will pick up a bit, but declines in home building and continued weak capital spending will keep a lid on more rapid growth – a trend she dubbed "growth gone mild."

"Although economic growth under 2 per cent is hardly a great result, it does extend Canada's recent string of steady and moderate economic growth," pointed out Toronto-Dominion Bank economist Jonathan Bendiner.

David Madani of Capital Economics said weather wasn't the only problem in the quarter. March, for example, looked particularly weak, with GDP expanding just 0.1 per cent from February, even as the winter weather eased, according to Capital Economics forecasts.

"If bad weather was the only factor affecting economic activity during the first quarter, then presumably we would have seen signs that economic activity was gradually improving towards the end of the quarter, as the weather returned closer to seasonal norms," Mr. Madani pointed out in a research note.

Another interesting feature of Canada's economic performance in the quarter is that the economy appears to be holding up better than the Bank of Canada expected, based on the forecasts contained in the central bank's April monetary policy report.

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Inflation is not as weak as Bank of Canada Governor Stephen Poloz feared. Last week's report on headline and core inflation for April (2 per cent and 1.4 per cent respectively) suggest inflation is running significantly ahead of the bank's forecasts.

Likewise, if first quarter GDP hits the Bloomberg consensus of 1.7 per cent, that would beat the the Bank of Canada's forecast of 1.5 per cent.

Economists say the bank may soon have to shift from the balanced monetary stance its been in since last fall. Mr. Poloz has insisted that the bank's next rate move is just as likely to be a rate cut as a rate hike.

But with the economy generally stronger than expected, Mr. Poloz might well have to take a rate cut off the table later this year.

"Chances of the bank considering cutting rates have faded further," said Bank of Montreal chief economist Douglas Porter.

Most economists still don't expect the bank to start raising its key overnight rate, fixed at one per cent for more three years, until mid to late 2015.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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