Canadian Economic Recovery in Full Force in Q1
– Canadian real GDP grew by a stunning 6.1% (annualized) in Q1/2010, slightly above the market consensus expectation of 5.8%. This is the strongest quarterly gain in over a decade. A robust monthly gain of 0.6% in March provides a strong hand-off into Q2.
– The strength was broad-based with domestic demand at the top of the list. Consumer spending (+4.4%) and residential investment (+23.6%) contributed the most to economic growth. Meanwhile, led by a 7.6% gain in investment in machinery and equipment, business investment grew by 0.9% following a 9.8% decline in the previous quarter. Nonresidential construction is one component of GDP yet to head down the road of recovery.
– In nominal terms, GDP expanded by 10.4%, after posting a 9.9% gain in Q4/2009. A contributing factor was the positive swing in the terms of trade, bolstered by rebounding commodity prices and an appreciating currency. This helped to support strong gains in corporate (+39.1%) and personal (+2.2%) income.
– Compared to pre-recession levels, real GDP remains 0.5% lower while nominal GDP still has 2.2% to make up.
– After two consecutive quarters of above 5% real GDP growth, the blockbuster performance in unlikely to be repeated. However, the strong momentum heading into the second quarter suggests growth of around 4%.
– We are of the view that much better-than-expected consumer spending and housing market performances so far this year came at the expense of future growth. The recent spending spree has left consumers even more fatigued and highly-indebted than ever. As interest rates begin to rise (as early as this weak) and households have to devote a greater share of their income to servicing their debt, this may well constrain future consumer spending growth.
– The resumption in business investment was a missing ingredient until Q1, and is encouraging. Firming up of business investment and a continued healthy performance in Canadian exports related to a strengthening U.S. economy through the second half of this year should help to offset some of the weakness stemming from domestic demand.
– Putting it all together, real GDP growth will likely moderate into the range of 2.5-3% in the second half ofthis year.