Stronger Canadian GDP growth in April to fade in May

  • Canadian GDP grew by 0.3% in April from March, with the gain evenly distributed between goods-producing and services-producing industries, both were up by a similar amount.
  • The advance estimate was that GDP growth slowed to 0.1% in May. Other early indicators have been softer, including a small 0.2% increase in manufacturing sales (much of it came from aerospace that doesn’t get captured in manufacturing GDP), a 0.6% decline in retail sales and a larger 0.9% decline in wholesale sales (ex-petroleum) all in May.
  • It’s worth noting that the GDP advanced estimates have a spotty record at predicting actual monthly changes in output. Still, taking it at face value, Canadian GDP as of May was tracking 1.8% (annualized) growth in Q2 from Q1, similar to but slightly above our forecast of 1.4% annualized growth in Q2 as a whole.
  • Back to April, stronger production growth was seen in wholesale sales (+2%) and support activities for oil and gas extraction (+6.9%). The prior was boosted by a surge in auto and parts wholesaling and the latter was ahead of the start of TMX pipeline operations in early May.
  • Outside of those sectors, output also grew more for manufacturing (+0.4%), finance and insurance and arts (+0.4%), entertainment and recreation (+0.9%). StatCan (again) attributed the rise in financial investment services to unusual levels of market volatility given geopolitical uncertainties and pending Bank of Canada interest rate announcement at the time. The growth in arts and entertainment output was linked to the NHL playoffs that started in the second half of April.
  • Construction was among the handful of sectors that subtracted from growth in April, dropping by 0.4% thanks mostly to lower residential building activities. StatCan pointed out that activity in that sub-sector was almost a quarter lower comparing to its peak level three years ago.
  • Bottom line: Today’s GDP report showed widely based gains in output among Canadian industries in April but with that momentum quickly fading in May. Growth in Q2 to-date would still leave output per-capita falling for the seventh quarter out of the last eight. And the economy as it stands is still in excess supply, leaving it room to grow without adding to inflation pressures. That’s why we think the BoC will carry on with cutting interest rates, with 100 basis points of cuts to the overnight rate (including the 25 already done in June) expected this year. Even then, interest rates will still remain at levels high enough to restrict growth in the economy for some time, and we don’t expect per-capita GDP will return to positive territory until Q4 this year.

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