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Mar 29, 2018

Canadian GDP unexpectedly falls in January as housing chill sets in

Canadian economy unexpectedly contracts in January


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The Canadian economy unexpectedly shrank by 0.1 per cent in January, Statistics Canada data indicated on Thursday, in a clear sign that first-quarter growth is likely to be weaker than the Bank of Canada had predicted.

Analysts in a Reuters poll had expected gross domestic product to increase by 0.1 per cent after a revised 0.2 per cent gain in December. January's drop was the first since a 0.1 per cent decline in August 2017.

In January, the central bank forecast first-quarter annualized growth of 2.5 per cent, but it looks set to cut that estimate when it issues updated numbers on April 18.

"The underlying story is that growth remains on a sluggish underlying path of less than 2 per cent ... for the Bank of Canada, this reinforces the point that there is little urgency to hike rates again," said Doug Porter, chief economist at BMO Financial Group.

The central bank has raised interest rates three times since last July and says future moves will be heavily dependent on economic data.

Analysts noted that January GDP had been hit by temporary factors. Unscheduled maintenance shutdowns at some oil facilities helped cut non-conventional extraction by 7.1 per cent while real estate and rental and leasing declined by 0.5 per cent as tougher mortgage lending rules took effect.

"We expect a bounceback in February and March GDP, but we're going to revise down our first quarter GDP forecast to sub 2 per cent, adding weight to our view that the Bank of Canada is on hold until July," said Avery Shenfeld of CIBC Economics.

“We are expecting some dampening in housing activity,” Paul Ferley, assistant chief economist at RBC Economics, told BNN in an interview. “I think what we’re seeing in January is probably outsized, overstating the weakness. But I think you’re going to be looking at more moderate housing activity as we move through 2018 – reflecting sort higher mortgage rates and potentially the Bank of Canada continuing to tighten.”  

However, one economist isn't taking the housing weakness in such stride. 

"While most private-sector forecasters expect the pace of growth to be slower this year, most appear sanguine about the worsening housing downturn and the risks around a full-blown house price correction," David Madani, senior Canada economist at Capital Economics, wrote in a note to clients. "We still believe that the economy could stumble badly, prompting a reversal in monetary policy."

Canada's economy grew a modest 1.7 per cent on an annualized basis in the fourth quarter, well below the Bank of Canada's 2.5 per cent forecast.

In a note to clients, Krishen Rangasamy and Matthieu Arseneau of NBF Economics and Strategy said they expected first quarter growth of 1.5 per cent.

Pre-election budgets unveiled this week in Ontario and Quebec - Canada's two most populous provinces - should then boost growth later in the year, they added.

Separately, Statscan said producer prices edged up 0.1 per cent in February as a weaker domestic currency boosted the cost of motorized and recreational vehicles.

-- With files from BNN 


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