The Canadian economy grew at an annualized rate of 3.7% in the first quarter of 2017, led by strong growth in household spending, residential investment, and business investment in machinery and equipment. Household spending increased at its fastest pace in seven years, while residential investment grew at its strongest rate in five years. Business investment in machinery and equipment rose for the first time since 2014. Overall, the GDP report signals a broadly based economic recovery in Canada and is in line with the Bank of Canada's growth forecast, though some risks remain from trade policy changes.

1.
Canadian GDP 2017Q1 Report: Welcome Signs of a Broadly Based Recovery
The Canadian economy expanded above potential growth for a third consecutive quarter in 2017Q1 (3.7% q/q annualized,
see chart on page 2). The details of the GDP report show encouraging signs of a broadly based recovery. This
compensates for the fact that the 3.7% real GDP growth figure fell short of market expectations (4.2%).
To begin with, the breakdown of real GDP’s major components shows that household spending growth remains in the fast
lane. Household expenditures rose at its fastest pace in seven years (+4.3% q/q ann.). Growth in household expenditures
was broadly based in goods (6.0% q/q ann.) and services (3.0% q/q ann.) and the largest contributor was the second
consecutive 9% (q/q ann.) increase in motor vehicle purchases. In addition, residential investment increased at its fastest
pace in five years (+15.7% q/q ann.), thanks to an expansion in all sub-categories: homebuilding (16.4% q/q ann.),
renovation (8.6% q/q ann.) and an outsized surge in ownership transfer costs (25.4% q/q ann.) driven by the overheating
conditions in the GTA market during 2017Q1. Since the GTA resale market started to cool down in April due to the
targeted measures announced by the Ontario government, a pullback in the nationwide residential investment component
is in the cards in 2017Q2. Altogether, this robust increase in household spending has led Canadians to save a smaller
portion of their disposable income. The saving rate hit a two-year low of 4.3%.
The most constructive highlight of the GDP report is definitively the turnaround regarding business investment in
machinery and equipment (+25.4% q/q ann.). It marks the first increase in M&E business investment since the oil price
shock of late 2014 (see chart on page 2). Companies particularly invested more in industrial, computer, communication
and transportation equipment. A sustained rebound in commodity prices would likely support M&E investment in the
coming quarters although the NAFTA negotiations expected to start in August may delay some investment decisions. Also,
we are not overly concerned by the quasi-stagnation in Canadian exports registered in 2017Q1 (-0.3% q/q ann.). Some of
it is attributed to temporary factors such as the weakness in U.S. consumer spending last winter and a substantial decline
in the volatile aerospace exports category.
Bottom Line: The 2017Q1 GDP report is in line with the 3.8% real GDP growth forecast included in the BoC’s April
Monetary Policy Report. Also, the 0.5% m/m increase in real GDP for the month of March supports the maintaining of the
positive momentum in 2017Q2, although the recent floods in Quebec and the cooling of speculative activity in the GTA
housing market will weigh down on growth. All in all, the rebound in M&E investment is a welcomed development of the
broadly based expansion scenario the BoC is looking for. This being said, the sustainability of the recovery remains highly
contingent on new U.S. fiscal and trade policies that could be adopted within the next 12 months. If (it’s a big if) these
policies do not alter the Canadian outlook on the downside, BoC officials could be in a more suitable position to think about
raising the 0.50% overnight rate target.
Sébastien Lavoie | Chief Economist
514 350-2931 | lavoies@vmbl.ca

2. Economic Research and Strategy
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