The Canadian economy expanded by 0.8% quarter/quarter (q/q) in Q1 2022 (3.1% annualized), with final domestic demand up 1.2% (q/q). Furthermore, the flash estimate for April showed a deceleration to 0.2% month/month (m/m).
Spending by households increased by 0.8% q/q. Statistics Canada noted that this was the “third consecutive quarterly increase, as outlays on most goods and services expanded, even with limited capacity restrictions throughout Canada on in-person shopping and services.” Durable goods led the way, up 2.6% q/q, while spending on services rose by a more modest 0.7% q/q.
Residential investment rose again, up 4.3% q/q, with renovations spurring the gain. Investment in non-residential structures and machinery and equipment rose 2.9% q/q and 0.9% q/q, respectively. The release noted that “investment in engineering structures rose 3.5%, as spending on the Kitimat LNG project in British Columbia and oil and gas activity increased.”
Terms-of-trade rose 4.2%, as higher export prices (up 7.1% q/q) “were again heavily influenced by the rising price of crude oil.” Export prices rose strongly in other areas also, including “lumber (+25.0%), electricity (+24.8%) and refined petroleum products (+21.2%), reflecting continued price pressures due to supply constraints.”
Key Implications
GDP missed the mark, with expectations heading into the release looking for +5% growth (q/q annualized). This was largely due to weaker household consumption, with service spending failing to pick-up as expected given the reopening that was underway. Layering on the weak flash estimate for April, it is clear that Canada’s economic momentum is slowing. Though this was expected given rising inflation and high interest rates, the deceleration is occurring much quicker that previously thought.
We don’t think this will change the Bank of Canada’s thinking at its meeting tomorrow. We expect the Bank to hike by another 50 basis points, followed by another 50 in July. Bond markets aren’t reassessing either, with the 10-year Canada yield up another 10 basis points this morning.
