Canadian Analysis

The Bottom Line:

Canadian GDP came in sharply below expectations in Q1—edging down 0.1% (annualized rate) to mark a second consecutive quarterly decline following a 1% (previously reported as -0.6%) drop in Q4, and well below preliminary estimates of monthly output through March released a month ago that were pointing to growth closer to a 2% rate in Q1. 

Although the Q1 GDP decline is very small, two consecutive quarters of GDP decline are historically unusual. But underlying details still (also for a second consecutive quarter) look firmer than what would be typically expected at, say, the beginning of a recession. 

Consumer demand remained (broadly as expected) resilient in Q1 with a 1.5% increase with most of the downside surprise on overall Q1 GDP growth coming from a large drop in federal government weapon purchases after large increases in prior quarters. 

Net trade subtracted 4% from GDP growth but largely from a surge in imports (rather than a drop in exports) that was offset by a jump in inventory accumulation. 

The separately reported monthly production GDP add-up posted a 0.5% increase in Q1, and early estimates are for a 0.4% (not annualized) bounce-back in monthly production in April following a 0.1% March dip (although those preliminary estimates were once again shown to be highly unreliable in today’s Q1/March data release) 

And, critically, unprecedented slowing in population growth following unprecedented post-pandemic gains is significantly distorting the typical interpretation of top-line GDP growth. Statistics Canada reported per-person GDP rose an annualized 0.9% in Q1 with the size of the Canadian population declining outright for a second straight quarter—that’s a better outcome for how individual households experience the economic backdrop compared to, for example, the ostensibly respectable GDP increases in 2023/2024 that actually represented persistent declines on a per-capita basis. 

The data will still likely put more focus on the May labour market data in the week ahead—employment numbers have also softened in recent months, and the unemployment rate increased into April. 

But we continue to think underlying details in both the labour market and GDP data are better than headline growth number suggest. 

Canada’s economic outlook remains contingent on U.S. international trade policy remaining (broadly) stable and the oil price shock continues to cut into household purchasing power. But we look for the unemployment rate to drift gradually lower this year and for per-capita GDP growth to continue to broadly improve. 

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The Details:

• GDP edged down 0.1% (annualized rate) in Q1—well below early estimates from Statistics Canada a month ago that were pointing to growth of almost 2% in the quarter, and marking a second consecutive drop after a 1.0% decline in Q4. 

• Details, for a second quarter in a row, were not as bad as the headline growth figures suggest. 

• Final domestic demand (the sum of consumer, government, and business spending) did edge lower (-0.4%) but that retraced little of a 2.7% jump in Q4, and was up 1.3% from a year ago.

• Consumer spending rose by 1.5% and broadly consistent with our own tracking of card transactions that pointed to continued resilient spending in Q1.

• Residential investment continued to pull back alongside another decline in home resales and business construction investment declined sharply (-10.2%.) But business equipment purchases jumped 10.2% and intellectual property investments rose 13.8%.

• Net trade subtracted (as expected) almost 4 percentage points from Q1 GDP growth but that was largely offset by a large inventory build. 

• Most critically, the numbers continue to look better controlling for an unprecedented slowing in population growth. Per-capita GDP rose 0.9% (by Statistics Canada’s calculation) in Q1 as population declined for a second straight quarter.

• The separate monthly production GDP add-up looked slightly better, posting a 0.5% increase in Q1 to reverse a 0.5% decline in Q4, despite a 21% decline in motor vehicle manufacturing tied to widely publicized longer-than-usual winter factory shutdowns for retooling.

• The early estimate of April GDP shows a 0.4% increase. We continue to take those early estimates with a large grain of salt. They have been highly revision prone.

• Nominal GDP rose sharply (4.6%) in Q1 as higher oil prices boosted export revenues flowing into Canada’s oil producing regions. 

• Higher oil prices are also cutting into household purchasing power for non-gasoline products, but the household saving rate was little changed in Q1 (3.5%) from Q4 (3.7%) despite consumer spending remaining relatively resilient. 

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About the Author:

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

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