Media reporting on Canada's Q1 GDP data, released by Statistics Canada this morning, has mostly focused on the negatives. GDP rose only 0.1 percent quarter-to-quarter, the same pace as in the final quarter of 2018, making this the weakest half year of growth since 2015. However, the data were hardly surprising, given the frequent warnings from the Bank of Canada that the economy was going through a weak patch, and a look beyond the headline showed plenty of were plenty of positives.
From a growth standpoint, the main source of weakness in Q1 was the external sector. In volume terms, exports fell by 1 percent in the quarter, while imports rose 1.9 percent. There was also a 1.6 percent decline in residential construction investment. However, there was a 0.9 percent real increase in household spending -- which makes sense, given the strong gains in employment seen in recent months -- and an 8.7 percent leap in business investment. Business inventory accumulation, both farm and non-farm, also exerted a positive influence. StatsCan notes that one big driver of inventory accumulation was a rise in cannabis stocks, in advance of the full legalization of the product in April.
While keeping rates on hold this week, the Bank of Canada expressed confidence that the slow patch in the economy was coming to an end. Monthly GDP data for March, also released by StatsCan this morning, appeared to confirm this. After falling 0.2 percent in February, real GDP rebounded by 0.5 percent in March. The recovery was very broad-based, with gains in manufacturing, mineral extraction and services all contributing. This strong "hand-off" at the end of Q1 will go a long way toward ensuring that Q2 GDP data show significantly faster growth than in the past two quarters.
There are still headwinds, mostly on the trade front. Donald Trump's insane trade wars show no sign of winding down, with the White House threatening Mexico with tariffs even as it presses for the ratification of the NAFTA replacement. Moreover, Canada has trade problems of its own with China, centred on the detention of a senior executive of Huawei in response to a US extradition request. China has responded by cutting back on imports from Canada, mainly in the agricultural sector. Even if the economy does move ahead more strongly in Q2 and in the second half of the year, there is no prospect of any change in Bank of Canada policy until some time in 2020.
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