Canada’s First-Quarter Growth Disappoints at 3.1%, April GDP Seen Up 0.2%
Canada’s economic growth slowed in the first quarter of 2022. After adjusting for inflation, gross domestic product grew at an annualized pace of 3.1%, slowing from 6.6% in the fourth quarter of 2021, Statistics Canada said. While that growth was in line with the central bank’s expectations, it fell short of the median estimate from Bay Street analysts, who called for growth of 5.2%.
The overall growth for the first quarter came as the economy grew 0.7% in March and Statistics Canada said its preliminary reading for April indicates the economy grew 0.2% for the month, but cautioned the figure would be revised when it releases its official figure on June 30.
The weak spot in the report was international trade, with both exports and imports falling. However, economists were largely upbeat about other details – notably, that consumers and businesses are continuing to spend amid sky-high inflation. Final domestic demand rose 4.8% on an annualized basis, with hefty gains in household spending, business investment and purchases of residential real estate.
The Canadian economy also held up better than other major economies during a first quarter that was jolted by the Omicron variant of COVID-19. For instance, the United States and Japan posted GDP declines at the outset of the year, while growth was muted in the euro zone.
“The relative resilience of the Canadian economy in the quarter may be a broader theme for 2022, aided by its heavy commodity component and a greater capacity to rebound in the service sector following two years of heavy restrictions,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.
Financial analysts said the GDP report was unlikely to redirect the Bank of Canada from its quickest pace of policy tightening in decades. On June 1, the Bank of Canada hiked its key overnight interest rate by 50 basis points to 1.5% and will also continue quantitative tightening. The bank’s policies are “now geared almost exclusively on scalding inflation – so a modest growth miss is not going to divert coming rate hikes one iota,” Mr. Porter added.
In various respects, the Canadian consumer appears to be in good shape. Compensation of employees rose 3.8% in the first quarter in nominal terms, following a 2% rise in the fourth quarter. It was the largest growth in compensation since 1981, excluding the third quarter of 2020, when the country was rebounding from the first wave of COVID-19.
Canadians also hung on to more of their money. The household savings rate rose to 8.1% of disposable income from 6.9% – and far above the quarterly average of 3.4% during the 2010s.
Households have amassed a bulk of savings during the pandemic, particularly those in higher income brackets, and that’s helping them to continue spending amid lofty inflation. Household spending rose at an annualized rate of 3.4%, with strong purchases of durable goods.
The flip side is that, because people are able to keep spending, that’s helping to fuel the rapid climb in consumer prices. Several analysts expect the Bank of Canada to hike interest rates by another half a percentage point in July – a rapid pace of increases that some households could struggle to adapt to.
This cycle of monetary policy tightening has already led to weaker sales and falling prices in many of Canada’s exuberant housing markets. However, that shift hadn’t yet materialized in the new GDP report. Investment in residential real estate jumped by 18%, on an annualized basis, driven by expenditures on renovations and costs associated with home purchases. Residential construction gained 4.3 % as spending on renovations rose 9.3%, resale costs gained 4.6% and new construction rose 0.2%.
While trade slipped during the opening months of 2022, Canada’s terms of trade – the ratio between the price of exports and imports – jumped to a record high, owing to the recent surge of commodity prices, such as crude oil and lumber.
The U.S. Economy Shrank in the First Three Months of the Year Despite Consumer and Business Spending
The U.S. economy shrank in the first three months of the year even though consumers and businesses kept spending at a solid pace, the government reported in a slight downgrade of its previous estimate for the January-March quarter.
This drop in the U.S. gross domestic product – the broadest gauge of economic output – does not likely signal the start of a recession. The contraction was caused, in part, by a wider trade gap: The nation spent more on imports than other countries did on U.S. exports. Also contributing to the weakness was a slower restocking of goods in stores and warehouses, which had built up their inventories in the previous quarter for the 2021 holiday shopping season. Analysts say the economy has likely resumed growing in the current April-June quarter.
The Commerce Department estimated that the economy contracted at a 1.5% annual pace from January through March, a slight downward revision from its first estimate of 1.4%, which it issued in April. It was the first drop in GDP since the second quarter of 2020 – in the depths of the COVID-19 recession – and followed a robust 6.9% expansion in the final three months of 2021.
The nation remains stuck in the painful grip of high inflation, which has caused particularly severe hardships for lower-income households, many of them people of colour. Though many U.S. workers have been receiving sizeable pay raises, their wages in most cases haven’t kept pace with inflation. In April, consumer prices jumped 8.3% from 2021, just below the fastest such rise in four decades, set in March.
Still, by most measures, the economy as a whole remains healthy, though likely weakening. Consumer spending – the heart of the economy – is still solid: It grew at a 3.1% annual pace from January through March.
And a strong job market is giving consumers the money and confidence to spend. Employers have added more than 400,000 jobs for 12 straight months, and the unemployment rate is near a half-century low. Businesses are advertising so many jobs that there are now roughly two openings, on average, for every unemployed American.
The economy is widely believed to have resumed its growth in the current quarter: In a survey released in May, 34 economists told the Federal Reserve Bank of Philadelphia that they expect GDP to grow at a 2.3% annual pace from April through June and 2.5% for all of 2022. Still, their forecast marked a sharp drop from the 4.2% growth estimate for the current quarter in the Philadelphia Fed’s previous survey in February.
Considerable uncertainties, though, are clouding the outlook for the U.S. and global economies. Russia’s war against Ukraine has disrupted trade in energy, grains and other commodities and driven fuel and food prices dramatically higher. China’s draconian COVID-19 crackdown has also slowed growth in the world’s second-biggest economy and worsened global supply chain bottlenecks. The Federal Reserve has begun aggressively raising interest rates to fight the fastest inflation the United States has suffered since the early 1980s.
The Fed is banking on its ability to engineer a so-called soft landing: Raising borrowing rates enough to slow growth and cool inflation without causing a recession. Many economists, though, are skeptical that the central bank can pull it off. More than half the economists surveyed by the National Association for Business Economics foresee at least a 25% probability that the U.S. economy will sink into recession within a year.
“While we still expect the Fed to steer the economy toward a soft landing, downside risks to the economy and the probability of a recession are increasing,” economists Lydia Boussour and Kathy Bostjancic of Oxford Economics cautioned in a research note. “A more aggressive pace of Fed rate hikes, a tightening in financial conditions, the ongoing war in Ukraine and China’s zero-Covid strategy increase the risk of a hard landing in 2023,” they added.
In the meantime, higher borrowing rates appear to be slowing at least one crucial sector of the economy – the housing market. Last month, sales of both existing homes and new homes showed signs of faltering, worsened by sharply higher home prices and a shrunken supply of properties for sale.
Source: Globe and Mail