Economic commertary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The economy rebounded in the first quarter, increasing 1.7% q-o-q, but weaker than expected and growth in the fourth quarter was revised lower. The details show strength in domestic demand, while inventories were the main drag. Consumer spending was the main source of growth, but most of the strength comes from higher population and the higher frequency rate suggests some slowing going into Q2. With growth remaining weaker than population growth, GDP per capita continued to decline and is now about 3.6% lower than its recent peak.
Disposable income rose in the first quarter due to higher compensation of employees and net property income. With inflation moderating, real disposable income showed a robust increase, suggesting some improvement in households’ purchasing power. Nevertheless, real disposable income remains below its pre-pandemic trend. The saving rate rose on the quarter and is reaching its highest level since 1996, if the pandemic is excluded, suggesting that households continue to be cautious with their spending and supported by higher interest rates.
With the preliminary estimate for March suggesting the economy expanded by 0.3% m-o-m, growth is expected to be resilient going into the second quarter. Assuming no change in economic activity in May and June, growth in Q2 could be around 1.5% q-o-q ar.
Today’s GDP number does not change our view for the Bank of Canada and continue to think the BoC will cut at its June meeting. Growth in Q1 was weaker than potential, suggesting further widening of the output gap.
With all measures of core inflation below 3%, the momentum in the BoC’s preferred measures below 2.5% and the breadth of the inflationary pressures in line with the historical average, all the conditions we had identified (see) to support a rate cut have been met. If the BoC doesn’t cut next week, it would be a matter of extreme caution in our view, rather than suggesting that upside risks to inflation remain a concern. Nevertheless, whether they cut in June or July has very little impact on the outlook. What matters more will be the speed and the number of cuts we will see over the next year.
Canadian economic activity rose by 1.7% q-o-q annual rate (ar) in the first quarter of 2024 (+0.5% y-o-y), weaker than expected. This followed an upwardly revised increase of 0.1% q-o-q ar. in the fourth quarter of 2023 (originally reported as +1.0% q-o-q ar.).
In terms of details, strong consumer spending (contributing 1.6 percentage points (pp) to growth), an increase in business investment (contributing +0.6pp to growth), and government spending (contributing 0.5pp to growth) were the main sources of growth on the quarter. Net exports barely increases (contributing +0.1pp to growth).
These increases were partly offset by slower inventory accumulation (subtracting 1.5pp to growth). Final domestic demand increase strongly in Q1, contributing 2.8pp to growth in Q4.
Household spending increased by 3.0% q-o-q ar, contributing 1.7pp to growth. This followed an upwardly revised increase of 3.2% q-o-q ar. in the fourth quarter of 2023. The increase in consumer spending was the result of higher spending on services (+4.3%% q-o-q ar.), driven by strong spending on telecommunications services, rent and air transport. Spending on goods increased more modestly (+1.3% q-o-q ar.).
Residential investment increased by 1.3% q-o-q ar., adding 0.1pp to growth. The higher activity was mainly in resale activity, while new construction was flat.
Business investment dropped 3.2% q-o-q ar. on the quarter, adding 0.3pp to growth. The details show a decrease in machinery and equipment investment (6.4% q-o-q ar., adding 0.2pp to growth), mainly due to a higher investment on industrial machinery. Investment in non-residential structures increased 1.9% q-o-q ar., adding 0.1pp to growth, as a result of higher spending on engineering structures, primarily within the oil and gas sector.
The external sector barely grew in Q1, contributing 0.1pp to growth. Exports of goods and services rose 1.9% q-o-q ar. in Q1, adding 0.6pp to growth. Exports of services rose 5.0% q-o-q ar., while goods rose 1.1%, as strong exports of precious metals were partly offset by weakness in crude oil and motor vehicles.
Imports increased 1.6% q-o-q ar., subtracting 0.5pp to growth. Higher imports of clothing, footwear and textile products led the increase in the first quarter of 2024, while these gains were partially offset by a decline in passenger cars and light trucks.
Canada’s terms-of-trade deteriorated in Q1 (-1.2% q-o-q) mainly because of a stronger decrease in export prices (-1.3% q-o-q) compared to import prices (-0.1% q-o-q. Compared to its peak in 2022, the terms-of trade declined by 9.8% in 2023, mainly due to a decline in commodity prices.
On the income side, household disposable income rose by 1.8% q-o-q. The higher disposable income was mainly due to an increase in compensation of employees (+1.5% q-o-q) and higher net property income. Real disposable income is estimated to have increased by 1.3% q-o-q in Q1. With a bigger increase in disposable income than in consumer spending, the household saving rate inched higher to 6.9% from 6.2%, its highest since 1996 if we exclude the pandemic.
The monthly GDP for March was flat m-o-m (+0.6 % y-o-y). However, the preliminary estimate suggests that activity likely increased 0.3% in April.
The goods-producing sector was flat on the month (-1.6% y-o-y). Higher activity in construction, agriculture and utilities was offset by a decline in manufacturing and natural resources extraction.
The service sector was flat on the month (+1.6% y-o-y). Lower activity in wholesale, retail, finance and insurance, and transportation and warehousing was offset by gains in education, health care, arts and entertainment, and other services.
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. Despite a decline in overall oil and gas extraction, non-conventional oil and gas and support activities increased in March, same for the agricultural sector. However, there was weaker activity in the pipeline industry. Overall, the details suggests that Alberta may have marginally outperformed the rest of the country.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.