Canada’s economy grew 3.1% in the first quarter, slower than expected

(Ottawa) The Bank of Canada is still on track to announce a significant rate hike on Wednesday, although the latest data from Statistics Canada showed the country’s economic growth slowed in the first quarter, economists said.

Posted at 8:43 am
Updated at 11:39 AM

Craig Wong
Canadian Press

The federal agency said, on Tuesday, that real gross domestic product grew at an annual rate of 3.1% in the first quarter, supported by business investment and household spending.

This increase was less pronounced than the 6.6% increase recorded in the fourth quarter of 2021. Export volumes declined by 2.4% in the fourth quarter, after rising in the previous two quarters, partly due to a decline in trade in energy products.

Paul Ashworth, chief North American economist at Capital Economics, noted that growth in the first three months of the year was well below consensus expectations, but remained broadly in line with the Bank of Canada’s monetary policy report in April.

“The unexpected weakness in first-quarter GDP growth was due to a downward revision to January data, which now shows a 0.2% m/m contraction, as related restrictions (on the variable) OMICRON had a bigger impact than I previously thought,” Ashworth noted in a report. .

However, he added that the real economy remains on solid foundations, which means the Bank of Canada could go ahead with a half-percentage point rate hike on Wednesday.

Most economists expect the central bank to raise its main interest rate target by half a percentage point to 1.5%, in a bid to curb the highest inflation the country has seen in three decades.

Annual inflation was 6.8% in April, the highest level since January 1991, while the Bank of Canada aims to keep it as close to 2.0% as possible.

The central bank, which cut interest rates at the start of the pandemic, began raising the key rate earlier this year, raising a quarter point in March and raising another half a point in April.

Overall growth for the first quarter came with the economy advancing 0.7% in March. Statistics Canada said its preliminary reading for April forecast economic growth of 0.2% for the month, but cautioned that the number will be revised when its official data is released on June 30.

Economist Tu Nguyen from RSM Canada noted that weaker-than-expected first-quarter numbers are unlikely to change anything for the Bank of Canada, as growth remains solid.

“And when we look at the export numbers in the first quarter, we see that domestic business and consumer demand is still very strong, and I think that’s where the Bank of Canada will base its decision.” , She said.

MI Nguyen added that coronavirus restrictions have continued to ease, so the service sector will likely continue to recover as things return to full capacity.

Growth in multiple sectors

According to Statistics Canada, household spending rose 0.8% in the first quarter, marking the third consecutive quarterly increase.

Durable goods spending rose 2.6% in the first quarter, driven by a 16.1% increase in spending on new vehicles and a 3.5% increase in new trucks, vans and SUVs.

However, Statistics Canada noted that despite the increases, auto spending remained below pre-pandemic levels as supply chain issues continued to weaken the sector.

Residential construction is up 4.3%, with renovation spending up 9.3%, resale costs up 4.6% and new home building up 0.2%.

Business investment in non-residential buildings rose 2.9% and machinery and equipment 0.9% in the quarter, while spending on engineering structures rose 3.5%.

Statistics Canada also said employee compensation rose 3.8% on a nominal basis for the quarter. Excluding the third quarter of 2020, the federal agency indicated that this was the largest quarterly increase since the second quarter of 1981.

Significant wage growth has been observed across the economy, including in professional and personal services, commerce, manufacturing, health care, social assistance and building industries, the agency added.

MI Nguyen said the Bank of Canada is concerned that higher wages will perpetuate inflation.

“That’s not what the bank wants at all, so they’re going to try to stymie that and control long-term inflation expectations,” she predicted.

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