Canada: Short of expectations for stronger growth – Wells Fargo

Canada’s economy expanded at an annualized rate of 3.7 percent in Q1, stopping short of expectations for stronger growth, according to the analysts at Wells Fargo.

Key Quotes

“Domestic consumption drove the economy in Q1, while net exports of goods and services were a modest drag on growth due to a rebound in imports. Final domestic demand rebounded to its fastest pace since 2010 and business inventories contributed to overall growth.”

“Despite the economy’s strong momentum, inflation has been more subdued. In recent months, inflation has run below the Bank of Canada’s 2 percent target range and is at 1.6 percent year over year, as higher energy prices offset a decline in food cost. Core inflation sits at 1.1 percent, while the BoC’s three new measures of core inflation have remained muted.”

“Households were one of the largest contributors to growth with increases in consumer spending and vehicle purchases. Consumer spending has been so strong that Canadians’ personal savings rate has taken a hit, falling to 4.3 percent in Q1 and household debt has started to increase, rising to 14.2 percent over the quarter—a course not sustainable long term.”

“The BoC held its overnight rate unchanged at 0.50 percent at its latest meeting, but signaled that it is open to raising rates this year, given the strength of the economy—the first increase in nearly seven years. However, raising rates too quickly will weigh on household finances. That said, we do not expect the BoC to raise rates at its next meeting in July.”