Canada's economy grew more than expected in Q1, putting pressure on BoC

Canada’s economy grew 3.1 per cent annually in the first quarter of the year, Statistics Canada said on Wednesday, a stronger increase than what analysts and the Bank of Canada expected, as household spending bounced back.

Statistics Canada said real GDP growth in the first quarter was driven by favourable international trade and growth in household spending, and moderated by declines in housing and business investments.

Analysts surveyed by Reuters had forecast annualized growth of 2.5 per cent in the quarter and a decline of 0.1 per cent in March. GDP growth slowed in March on a monthly basis, coming in flat at 0 per cent, but preliminary estimates show that the economy expanded 0.2 per cent in April.

The increase in economic growth is the latest sign of ongoing resiliency in the economy, and adds pressure on the Bank of Canada to consider hiking rates again when the central bank issues its rate decision next week. The Bank of Canada had predicted GDP growth of 2.3 per cent in the first quarter.

"Overall, the headline reading, composition of growth and handoff to Q2 were all slightly stronger than we had expected, raising the odds of another Bank of Canada rate hike," CIBC Capital Markets senior economist Andrew Grantham wrote in a note on Wednesday. However, Grantham added that he expects the Bank of Canada will hold off on hiking its benchmark rate when it issues its decision next week, and that the central bank will instead "want to wait to see more data and revise their forecasts (in the July monetary policy report) before making a final decision on whether to raise rates again."

The Bank of Canada is scheduled to issue its latest interest rate decision next Wednesday. The bank held its benchmark rate steady at 4.5 per cent in April, but Bank of Canada Governor Tiff Macklem has said the central bank is prepared to continue hiking rates as it tries to tame inflation.  

"It seems likely the Bank of Canada will be seriously considering raising rates next week," Desjardins head of macro strategy Royce Mendes said in a note shortly after the data was released.

"While they might pass on changing course just yet, the belief that the central bank will further tighten policy this summer is justifiably gaining traction."

Money markets are pricing in a 40 per cent chance of a hike next week, up from 28 per cent before the data, and they fully expect an increase of 25 basis points by September.

"The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week's policy decision," BMO Capital Markets chief economist Douglas Porter wrote in a note, although he also expects the central bank "to remain patient for a bit longer."

Exports of goods and services increased 2.4 per cent in the quarter, led by cars and trucks, outpacing a 0.2 per cent increase in imports.

Household spending for both goods and services grew in the first quarter of the year. Spending on goods was up 1.5 per cent, driven by vehicle sales for new trucks, vans and SUVs. Service spending was up 1.3 per cent in the quarter, with food and non-alcoholic beverage services up 4.4 per cent and alcoholic beverage service up 6.5 per cent.

While spending fuelled economic growth, the household saving rate dropped to 2.9 per cent in the first quarter, down from 5.8 per cent at the end of 2022, the lowest level since before the COVID-19 pandemic.

“Canadian consumers remained in spending mode in the first quarter, propelling GDP growth past the expectations of many,” Royce wrote.

“Household consumption reaccelerated after a couple of softer quarters, with Canadians spending more of their incomes. That pushed the savings rate down to 2.9 per cent from 5.8 per cent in the prior quarter, a potential sign that interest rates aren’t yet high enough to curb spending.”

With files from Reuters.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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