Economic activity returning to its lacklustre trend

Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud. 

Bottom line

Today’s release of the monthly GDP shows that the strong economic momentum seen at the start of the year is unsustainable. The economy is returning to its lacklustre performance, especially now that the temporary impact from the end of the strikes in Quebec and the deep cold in Western Canada are dissipating, with economic activity expected to have been flat in March.

Nevertheless, economic activity is estimated to have increased by +2.5% q-o-q ar in 2024Q1, the strongest in a year. However, this performance is not expected to put an end to its current series of declines in GDP per capita.

With the special factors that boost growth in Q1 dissipating, growth is expected to remain tepid Q2. As we have argued (see Will it be a hard landing or a soft landing? The labour market will decide), whether we see an underperformance in hiring or job losses will matter greatly for the outlook in 2024, especially given the current household challenges.

Today’s GDP number suggests that growth in Q1 will be roughly in line with BoC’s April MPR forecast and is unlikely to impact the Bank of Canada’s thinking. In our view, the return to slower momentum in the economy solidifies our view that the BoC will cut its policy rate at the June meeting. However, we also not that an upside surprise to inflation in April could delay the first rate cut.

For Alberta, the details available in the report suggest that economic activity likely outperformed the rest of the country in February due to a rebound in oil and gas extraction and pipeline activity following the January cold snap. The high energy prices remain a tailwind to the Alberta economy this year, but not as much as in the past decade (see Where’s the boom? How the impact of oil on Alberta may have permanently weakened). Moreover, continued strong population growth in the province continues to push economic activity higher.

The monthly GDP increased 0.2% in February (+0.8% y-o-y), weaker than expectations. The details show that 12 of 20 industrial sectors posted gains on the month. The data showed some normalization after being impacted by special factors in January, such as the extreme cold in Western Canada and the end of the teachers’ strike in Quebec. Despite the overall economy being 4.7 percentage points above its pre-pandemic level, 8 out of 20 industrial sectors still have economic activity below their pre-pandemic levels, namely agriculture, utilities, construction, transportation and warehousing, management of companies, administration and support services, arts, entertainment and recreation, and accommodation and food services.

Statistics Canada’s preliminary estimate shows that GDP was likely flat in March. This suggests that growth in the first quarter of 2024 is likely to be around +2.5% q-o-q ar. This would be the strongest quarterly increase since 2023Q1. However, growth Q1 is unlikely to be stronger than population growth, meaning that GDP per capita is likely to decrease by about 1.0% q-o-q ar. in Q1.

The goods-producing side of the economy was flat in February. A normalization of activities after the extreme cold weather seen in January led to a big decline in utilities (-2.6% m-o-m) and a strong rebound in natural resource extractions (+2.5% m-o-m), with strong gains in the oil and gas sector. There were also gains in agriculture (0.5% m-o-m). The higher activity was offset by a decline in manufacturing (-0.4% m-o-m) and in construction (-0.1% m-o-m).

The services-producing side of the economy increased by 0.2% in February. The strong rise in activity in the transportation and warehousing industry, especially pipeline activity, was the main source of growth (+1.4% m-o-m). The were also some solid gains in accommodation and food services (+0.5% m-o-m), wholesale trade (+0.3% m-o-m), finance and insurance (+0.3% m-o-m), and other services (+0.3% m-o-m). The higher activity was partly offset by declines in retail trade (-0.2% m-o-m), information and culture (-0.5% m-o-m), arts, entertainment and culture (-0.4% m-o-m), management of companies (-4.4% m-o-m).

For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The big rebound in oil and gas extraction and pipeline activity shows rebounded in February. However, lower utilities activity and retail sales likely reduced part of this rebound in activity. As a result, Alberta likely outperformed the rest of the country.