GDP data shows persistent weakness, raising prospect of rate cuts

Canada continued to eke out some growth at the beginning of the year, according to the latest GDP data out on Friday, but the nation’s economy is showing persistent signs of fragility that will likely lead the Bank of Canada to begin cutting interest rates as soon as next week.

Statistics Canada released quarterly national economic accounts on Friday that showed growth actually accelerating in the first quarter of this year, expanding by 0.4 per cent (or an annualized pace of 1.7 per cent). That’s the strongest pace in a year, and an improvement from the zero growth that we saw in the second half of last year.

The economy is being supported by strong gains in compensation to workers, rising employment and population growth. That’s producing relatively robust consumer spending, the data shows. Consumers are not totally exhausted.

Increases in government spending continue to help generate demand. Exports are also doing relatively well. 

There’s no major signs of a recession. But the broader picture remains one of weakness.

Despite a slight pick up in capital spending last quarter, investment continues to be lethargic and businesses are paring back inventory accumulation – potentially a sign of diminished confidence. While higher wages are facilitating more spending, households are also saving a greater part of their income, which suggests a level of caution remains.

In fact, Canada’s economy has almost never been so weak outside of a recession. Even with the first-quarter acceleration, the economy has grown just 0.5 per cent over the past year. 

The weakness should lead the central bank to ease up on its high-rate policy. The Bank of Canada’s next policy decision is on Wednesday, when many economists expect the central bank to begin a series of rate cuts over the next year and a half.