Bank of Canada Governor Poloz’s now infamous “atrocious” comment about the Canadian economy may not have been so far off base, some economists are saying.
The consensus called for a small uptick in Canadian real gross domestic product in 2015’s first quarter, but Statistics Canada took analysts off guard this morning (May 29) by announcing the economy had actually contracted in Q1.
Real GDP fell 0.6% at an annualized rate over the quarter, driven by a particularly weak March. Not surprisingly, the weakness was led by a drop in mining and oil and gas activities, which plummeted 2.6%. This itself was led by a 17% plunge in support activities, including drilling.
BMO Financial Group chief economist Douglas Porter said the bank has cut its annual forecast to 1.5% for 2015.
“To put it in perspective, growth of 1.5% would be the slowest for Canada outside of recession in at least the past three decades,” Porter said.
“Suffice it to say, this dreary growth backdrop will keep the Canadian dollar on the defensive, and the Bank [of Canada] more biased to ease than tighten barring a surprising revival in oil prices.”
Porter said growth of 2.2% is projected for 2016.
Business investment fell 15.5% on an annualized rate, reflecting capital spending cuts in the energy sector. On the other hand, consumer spending, housing and government outlays saw slight gains.
The United States released revised GDP figures for Q1 at the same time, and a similarly dismal annualized drop is being reported.
“Remarkably, the U.S. economy at -0.7% was even more atrocious than Canada, with only one-quarter the oil sector’s weight,” Porter said.
RBC Economics’ Josh Nye said this downward revision to the U.S. figures was “clearly disappointing” but the details aren’t as negative as it may sound.
A strong U.S. dollar, labour disputes at west coast ports and harsh winter weather all pulled downward on these figures, he said.
“We expect the reversal of these transitory factors to boost growth in domestic demand back above a 3% pace in the second quarter.”
Porter said, “While the equally weak U.S. result for the quarter provides some cover, it now looks like Canada will have a much tougher time than the U.S. rebounding quickly in Q2 from the winter chill.”
The Canadian dollar plunged more than half a cent on the release of this morning’s data, falling as low as 79.90 cents U.S. As of press time, there had been some rebound back above the 80-cent mark, at 80.21 cents U.S.
