After what looked like a promising start to the year, the Canadian economy contracted 0.2% in March after shrinking 0.1% in February, Statistics Canada announced May 31.
The decline was due in large part to a 2.8% drop in mining, quarrying and oil and gas extraction in the month. Support services for this sector dropped 14% as rigging and drilling services declined. Oil and gas extraction alone decreased 0.8% in the month, and a drop in metal ore and potash mining was behind a 3.7% decline in mining and quarrying.
Strength in the first month of the year contributed to an overall 2.4% annualized growth rate in 2016’s first quarter. This rate was slightly below analysts’ expectations.
“On the face of it, the Canadian economy appeared to be off to the races in the first quarter, posting its strongest result in five quarters,” TD Economics senior economist Leslie Preston said in a note to investors. “Looking through the details, however, the quarter ran out of steam by March, and the worry is the start-of-year performance may prove a one-trick pony.
“The disappointing monthly GDP reading in March means that economic momentum was already looking soft heading into the second quarter, and the disruption of oil production in the oil sands due to the Alberta wild fires will worsen what was already looking like a soft quarter.”
Retail trade fell 1.3% in March after increasing in both January and February. The drop was seen across all retailer types, but the biggest decline was in motor vehicles and parts dealers, down 3.9%.
Wholesale trade fell 0.3% in the month as motor vehicles and parts output dropped in response to lower exports. Output for wholesalers of machinery, petroleum products, food, beverage and tobacco and equipment and supplies increased in the month.
Manufacturing output fell 0.2% in March, driven by a 0.9% drop in durable-goods manufacturing. This drop was related to a decline in the production of motor vehicles and parts and aerospace products and parts.
Not all sectors saw declines in the month. A jump in residential construction was the main driver behind a 0.1% increase in construction. Real estate agent and broker output increased 2.2%—the sixth consecutive monthly rise—as home resale activity increased. As well, finance and insurance increased 0.4% and the public sector rose 0.1%.
Preston pointed out that this latest data provides support to the Bank of Canada’s latest announcement that the adjustment to lower oil prices has been uneven.
“Since last year’s recession, the pattern seems to be a one-quarter boost to activity, followed by a disappointment,” Preston said. “Over the past year, Canada’s economy has grown 1.1%, below its estimated potential growth rate. That means that while the economy is growing, it is not yet making much progress picking up the economic slack that opened up in last year’s recession.
“We expect capacity-absorbing growth to get underway in the second half of this year, with another strong quarter in the third quarter driven by a recovery from the wildfires.”
Robert Kavcic, senior economist and vice-president of economic research for BMO Capital Markets, agrees that Q3 will likely see a return to growth.
“Smoothing out the volatility over this period [from the fourth quarter of 2015 until Q3 2016] will likely leave average growth at roughly 1.5%, right around potential,” Kavcic said.
“And the Bank of Canada has made it crystal clear that they are looking right through the volatility and remaining firmly on the sidelines.”
The Canadian dollar dipped almost half a cent on Statistics Canada’s release, settling around 76.34 cents U.S. as of press time.
@EmmaHampelBIV
