How good is Canada's first-quarter GDP report? Well, it was better – but far from perfect. It showed an economy firing on some more cylinders than in the dreary fourth quarter, but it's still misfiring in some significant areas.
First, the obvious good news: 2.5 per cent annualized growth is the best performance in six quarters. It's a full percentage point above what the Bank of Canada was projecting as recently as last month, and a sharp increase from the fourth quarter's 0.9-per-cent pace – which itself was revised upward from an originally reported 0.6 per cent. It was also toward the upper end of the range of economists' estimates. And it's a touch better than the 2.4 per cent annualized growth reported in the United States – an economy that, we've been told repeatedly, has much better momentum than Canada's this year.
Canada's monthly GDP growth for March also came in stronger than had been expected, up 0.2 per cent from February. Economists were quick to note that this establishes some strong economic momentum heading into the second quarter – perhaps setting us up for some better-than-expected results there, too.
So all is looking up, right? Um, no. Not quite.
Beneath the headline number, final domestic demand – basically, the sum of all consumer, business and government expenditures within Canada – grew at a paltry 0.6 per cent annualized in the first quarter. That's the weakest domestic demand growth since the 2009 recession. Fixed capital spending by both government and business (which includes the housing sector) declined; household spending grew a tepid 0.9 per cent annualized; manufacturing growth remained in neutral.
In fact, if it weren't for a rebound in exports, there wouldn't have been much growth at all. Net exports were responsible for nearly 60 per cent of the quarter's GDP growth (1.4 percentage points). An inventory build-up by businesses accounted for another 0.5 percentage point.
Both speak to a couple of economic engines the Bank of Canada is counting on to drive growth this year – improved export markets and more spending by the corporate side of the economy. With the household sector in a debt-downshift phase and governments committed to constraining their spending, the corporate and exports sectors are about all the economy might have going for it in the coming months. And while exports cranked out a hefty 6.2-per-cent annualized growth in the quarter, we're still waiting on business investment, which was up a sluggish 0.7 per cent annualized.
Given the big gains in exports, and the fact that the expected slowdown in government contributions hadn't really materialized yet (public-sector expenditures grew 1.3 per cent annualized in the quarter), it's going to be hard to maintain the 2.5-per-cent growth pace. Economists are looking for a pullback to more like 2 per cent for the second quarter, and they remain nervous that the second half of the year will be even weaker. We'll probably need to see continued improvement in our export markets (essentially, more growth in the United States) if we have any hope of seeing this kind of strength in quarterly GDP again this year; the domestic demand simply isn't there.