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Economy appears to be losing steam as growth slows down in first quarter

May 31, 2016 - 10:17 AM

OTTAWA - The Canadian economy appears to be losing steam as it heads into the second quarter, which is expected to be a tough period made worse by the Alberta wildfires.

Statistics Canada said Tuesday the economy contracted by 0.2 per cent in March for a second consecutive negative month as real gross domestic product grew at a slower-than-expected pace in the first quarter.

David Watt, chief economist at HSBC Bank Canada, says the economy is struggling to maintain its underlying momentum.

"The important takeaway from my perspective is that we had this weakness unfolding even before we start talking about the wildfires in Alberta, which is going to just disrupt economic data over the next couple of months," he said.

"My concern is that we lack drivers of the economy heading into the second quarter and into the second half of the year."

The economy grew at an annual rate of 2.4 per cent in the first quarter, Statistics Canada said. That was slower than the 2.9 per cent pace economists had expected, according to Thomson Reuters.

Overall, growth in the first quarter was helped by exports, which were up 1.7 per cent following a drop of 0.4 per cent in the fourth quarter of 2015. Investment in housing was also up in the first quarter, with business investment in residential structures up 2.7 per cent and household final consumption spending rising 0.6 per cent.

But Watt says weak business investment has raised concerns.

"Non-commodity manufacturers should be a sector that would benefit from a weaker Canadian dollar and U.S. demand and they're cutting investment," he said.

Going forward, Watt said the trade figures for May will likely be weak due to the wildfires. But he said they should bounce back in June and July as the oilsands restart operations.

The Bank of Canada said last week that the fires that devastated parts of Fort McMurray, Alta., and forced the shutdown of several oilsands operations would shave 1.25 percentage points off real GDP growth in the second quarter.

The prediction implies the economy will contract in the second three months of the year based on the central bank's prediction of growth at a pace of 1.0 per cent.

The Bank of Canada is expected to update its full outlook for the economy and inflation in its next monetary policy report on July 13, when it also makes its next rate announcement.

TD Bank senior economist Leslie Preston said the GDP report is further evidence of the central bank's message that the adjustment to lower oil prices has been uneven.

"The underlying fragility of Canada's economy beneath this see-saw growth pattern will necessitate monetary policy to remain stimulative for quite some time," Preston said.

"We don't expect the Bank of Canada to raise interest rates until 2018 at the earliest, with any further stimulus for the economy to come from fiscal policy."

In addition to the reports for March and the first quarter, Statistics Canada lowered its estimate for January growth to 0.5 per cent compared with an earlier estimate of 0.6 per cent. It also cut its estimates for growth in the last three quarters of 2015.

Based on the revisions, Statistics Canada now estimates that growth for last year came in at 1.1 per cent compared with its earlier reading of 1.2 per cent.

News from © The Canadian Press, 2016
The Canadian Press

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