The Canadian economy grew by 3.1% in the 1st quarter, slower than expected

(OTTAWA) The Bank of Canada is still on track to announce a major interest rate hike on Wednesday, even though the latest data from Statistics Canada showed the country’s economic growth slowed in the first quarter, experts said. economists.

The federal agency said Tuesday that real gross domestic product (GDP) grew at an annualized rate of 3.1% in the first quarter, supported by business investment and household spending.

This increase was less pronounced than the 6.6% increase recorded in the fourth quarter of 2021. Export volumes fell 2.4% in the most recent quarter, after climbing in the previous two quarters, partly in due to the decrease in trade in energy products.

Paul Ashworth, chief economist for North America at Capital Economics, pointed out that growth for the first three months of the year was well below the consensus forecast, but remained broadly in line with the policy report. Bank of Canada April monetary policy.

“The unexpected weakness in first-quarter GDP growth was mainly due to a downward revision to January data, which now shows a contraction of 0.2% month-on-month, as related restrictions ( to the variant) Omicron have had a greater impact than previously thought,” Mr Ashworth observed in a report.

However, he added that the real economy is still on solid footing, meaning the Bank of Canada can go ahead with a half-percentage-point hike in its key rate on Wednesday.

Most economists expect the central bank to raise its key interest rate target by half a percentage point to 1.5%, in a bid to curb the highest inflation seen by the country in three decades.

Annual inflation hit 6.8% in April, its highest level since January 1991, while the Bank of Canada aims to keep it as close to 2.0% as possible.

The central bank, which cut interest rates at the start of the pandemic, began raising its key rate earlier this year, with a quarter-point hike in March and another half-point hike. percent in April.

The overall first-quarter growth came as the economy advanced 0.7% in March. Statistics Canada said its preliminary reading for April predicted economic growth of 0.2% for the month, but warned that figure would be revised when its official data is released on June 30.

Economist Tu Nguyen of RSM Canada pointed out that the weaker-than-expected first-quarter numbers are unlikely to change anything for the Bank of Canada, as growth is still solid.

“And when we look at the first quarter export numbers, we see that domestic demand from businesses and consumers is still very strong, and I think that’s where the Bank of Canada is going to base its decision.” , she noted.

M^me Nguyen added that COVID restrictions have continued to ease, so the service sector will likely continue to recover as things return to full capacity.

Growth in several sectors

According to Statistics Canada, household spending rose 0.8% in the first quarter, recording a third consecutive quarterly increase.

Spending on durable goods rose 2.6% in the first quarter, led by a 16.1% increase in spending on new motor vehicles and a 3.5% rise for new trucks, vans and sport utility vehicles .

However, Statistics Canada noted that despite the increases, spending on motor vehicles remained below pre-pandemic levels as supply chain issues continued to plague this sector.

Residential construction rose 4.3%, with renovation spending up 9.3%, resale costs up 4.6% and new home construction up 0.2%.

Business investment in non-residential buildings rose 2.9% and that in machinery and equipment rose 0.9% in the quarter, while spending on engineering structures rose 3.5% .

Statistics Canada also said employee compensation rose 3.8% on a nominal basis for the quarter. Excluding the third quarter of 2020, the federal agency noted that this was the largest quarterly increase since the second quarter of 1981.

The agency added that significant wage growth had been seen across the economy, including in professional and personal services, trade, manufacturing, health care and social assistance, and building industries.

M^me Nguyen said the Bank of Canada is concerned that higher wages will lead to persistent inflation.

“That’s not what the bank wants at all, so they will try to hamper that and control long-term inflation expectations,” she predicted.