Canada’s GDP Shrinks in January

Key question is timing of rebound and if Bank of Canada forced to act
March 31, 2015 Updated: March 31, 2015

Canada’s economy shrank 0.1 percent in January, but it wasn’t as bad as economists’ consensus expectations of a 0.2 percent drop. Still, the economy is definitely going through a rough patch and the question is, how bad is it going to get and for how long?

For now, most economists expect the Bank of Canada not to cut rates further in April, as this “front-loaded” weakness was more or less expected.

The main industries contributing to the decline in gross domestic product (GDP) were wholesale and retail trade and manufacturing. The standout industry was mining and oil and gas extraction.

Wholesale and retail factor into the services sector, which fell 0.3 percent—its first decline since February 2014. Mining and oil and gas extraction fall under the goods sector, which grew 0.3 percent.

We continue to expect Q1 GDP growth to come in below 1 percent annualized, the worst performance in years.
— Krishen Rangasamy, National Bank

What may seem counterintuitive is the contribution from the oil and gas sector. This was due to oil and gas output being near all-time highs. Canadian oil production has not slowed down in the face of oversupply as companies attempt to protect market share.

Cold Didn’t Help

On a year-over-year basis, the Canadian economy grew 2.4 percent, matching consensus expectations.

The March 31 data release by Statistics Canada was more eagerly anticipated than usual as market participants recalled atypical comments from Bank of Canada governor Stephen Poloz from London that first-quarter growth would be “atrocious.”

While the January decline isn’t unusual (November 2014 GDP declined 0.2 percent and August 2014 GDP declined 0.1 percent), it does point to Q1 GDP coming in well below the central bank’s January forecast of 1.5 percent.

The Bank of Canada’s next interest rate decision date comes in two weeks along with new economic projections in its monetary policy report.

“We’re not expecting much of an improvement in February, considering the atypically cold temperatures,” according to Krishen Rangasamy of National Bank in a March 31 note. “All told, we continue to expect Q1 GDP growth to come in below 1 percent annualized, the worst performance in years.”

“We see the first three quarters of the year averaging a bit below 1 percent, which might not be as quick an end to the soft patch as the Bank of Canada is thinking,” according to a note from CIBC’s Avery Shenfeld.

Shenfeld feels that this January data comes as little surprise to the central bank and suggests no further action for at least the next quarter.

“Our view is that a pick-up in Q4, with perhaps some green shoots showing through the Q3 data, could come just in time to avoid a follow-up rate cut,” said Shenfeld in a research note.

The key question is how much of the weakness is front-loaded and how severe will it be. If the shock due to oil and harsh winter is over sooner, that would be more in line with the Bank’s thinking. But for now, the latest figures don’t look likely to force the central bank to take out more “insurance” immediately.

The Canadian dollar got a small boost from the better-than-expected, albeit bad, news, rising about 0.003 from US$0.7830 to US$0.7860.

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Follow Rahul on Twitter: @RV_ETBiz