Canada’s households and businesses showed resilience at the start of the year despite a drop in exports that dragged economic growth down below expectations. 

Gross domestic product expanded by a 3.1 per cent annualized pace in the first quarter as exports fell due to temporary supply constraints in the oil sector. Domestic demand, however, jumped.

The expansion was less than the 5.2 per cent median estimate in a Bloomberg survey of economists, and weaker than preliminary data from Statistics Canada suggested. It was also down from a revised 6.6 per cent annualized rate in the final three months of last year.

Wednesday’s first-quarter data was nonetheless in line with Bank of Canada forecasts and is unlikely to alter the path for interest rate hikes. Markets expect a second half-percentage-point increase this week as officials move aggressively to wrestle inflation down from three-decade highs.

“Inflation remains the focus and that’s why we’re likely to get 50-bp hikes at each of the next two policy meetings, starting with tomorrow,” Benjamin Reitzes, head of Canadian rates and macro strategy at Bank of Montreal, said by email. 

The Canadian dollar reversed losses from earlier in the day after the report, and was trading 0.1 per cent higher at CUS$1.2641 per U.S. dollar at 9:56 a.m. in Toronto.

Production Snarls
Exports fell by an annualized 9.4 per cent at the start of 2022, in part due to a series of production disruptions in Canada’s oil sector that included COVID-19 shutdowns, cold weather issues and planned maintenance.

Domestic demand accelerated to 4.8 per cent annualized, up from 3.7 per cent in the fourth quarter on the back of stronger consumption and investment, in both housing and other sectors.

The numbers suggest households and businesses continued to spend, despite restrictions meant to contain the spread of the omicron variant, and rebounded quickly as authorities eased the lockdowns in February and March.

On a monthly basis, GDP rose for a 10th straight time in March, increasing by a stronger-than-expected 0.7 per cent. The expansion slowed in April, with Statistics Canada reporting a preliminary estimate of 0.2 per cent growth for the month.

Most components of domestic demand sped up in the first quarter. Consumption grew at an annualized pace of 2.9 per cent at the start of the year, up from 2 per cent in the fourth quarter, even with the restrictions. 

Household spending was helped by a jump in worker compensation, which was up 3.8 per cent on a non-annualized basis thanks to “significant” wage growth, the statistics agency said. Excluding the third quarter of 2020, that’s the fastest pace since 1981.

Much of the gain in compensation wasn’t even spent, with the savings rate increasing to 8.1 per cent in the three-month period, up from the end of last year.

While oil volumes fell in the quarter, the nation’s economy still generated more receipts from the sector thanks to higher prices. Growth in nominal output rose 3.7 per cent on a non-annualized basis due to higher wages and profits.

Investment in housing jumped to an annualized 18.1 per cent in the first three months, up from 12.4 per cent in the fourth quarter. Spending in non-residential investment slowed slightly but remained at a robust 9 per cent annualized growth.

The nation’s economy also got a boost from higher inventory build up at the start of the year.