Statistics Canada reported this morning that real GDP rose at an annualized rate of 3.7 percent in the first quarter of 2017. Analysts' expectations were unusually widely dispersed for this one, but the reported number is in the middle of the range. Real GDP for the final quarter of 2016 was also revised higher, to an annualized rate just shy of 3 percent. While not all of the relevant data are yet available, it seems that for the moment at least, Canada has the fastest-growing economy in the G-7.
The growth is broad-based. Household consumption expenditure rose 1.1 percent quarter-over-quarter, with vehicle sales remaining strong. This marks a clear contrast to the United States, where auto sales are lagging. Business fixed investment rose an impressive 2.9 percent, led by gains in housing construction and, more surprisingly, machinery and equipment purchases.
The gains in consumption and investment indicate that the Bank of Canada's rate policy is having the desired effect. The same can't be said, however, for its concomitant weak dollar policy. Exports slipped 0.1 percent in the quarter, propelled by weakness in services, while imports jumped more than 3 percent, reflecting the strength in domestic demand.
What happens next? In the near term, it looks like more of the same. StatsCan reported separately today that real GDP rose 0.5 percent in the month of March. The consensus had looked for a much lower number, creating a so-called "weak handoff" for Q2, but it appears that the economy retained good forward momentum entering the current quarter.
Looking further ahead, we have a combination of uncertainties and imponderables. It is still unclear what demands the Trump administration will bring to the table when the NAFTA renegotiation begins later in the year. The uncertainty over how this will play out makes the Q1 surge in business investment all the more surprising, though given the weakness is such investment over the past year, this may prove to be just a temporary blip.
Then there's household consumption. The strength here no doubt owes a lot to the sustained growth in employment seen over the past year, but it's also debt-driven. StatsCan notes that the household savings rate fell to a nugatory 4.3 percent in Q1, while the debt service/income ratio edged higher. As has been widely reported here and elsewhere, the household debt/income ratio is at an all-time record high of 167 percent, and shows no signs of reversing. Even a hint of higher interest rates could quickly push higher-debt households into distress, crimping consumer spending and thereby the entire economy.
A GDP growth rate of 3.7 percent is well above the Bank of Canada's estimate of the economy's trend growth rate, which is now not much above 1.5 percent. In more normal times this would suggest that tighter monetary policy could not be postponed for very long, but the Bank has given every indication that it is prepared to stay on its current course as long as CPI inflation remains contained. The Bank's July policy meeting also brings an updated economic outlook; given today's robust data, that should be interesting reading.
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