Canada’s latest gross domestic product data adds to the mountain of evidence that a rate cut by the Bank of Canada should come at its meeting next week for the recovery to begin.
The economy expanded by 0.4% in the first quarter after no change in the previous quarter, according to data released by Statistics Canada on Friday.
On an annualized basis, GDP grew by 1.7%, undershooting expectations. The weak growth is even more pronounced when one considers that the previous quarter’s GDP was also revised down.
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The growth was fueled almost entirely by consumer spending, which rose by 0.7%. In particular, spending on services rose by 1.1% as households spent more on telecommunication services, rent and air transport.
But this is hardly a choice made by consumers to spend but rather a reflection of the housing shortage, as rents are an essential component that cannot be eliminated from a household budget.
In addition, per capita spending inched up by a mere 0.1% after three quarters of consecutive declines. Households are experiencing increasing financial stress because of high interest rates, and the impact of higher rates on rents and mortgage payments hit lower income households even harder.
Businesses are delaying investments until the rate environment improves. Business investments rose by 0.8%, driven by spending on engineering and machinery and equipment, but this is largely concentrated in the energy sector.
A highlight in the report was household savings, which rose to 7%, the highest in the past two years. This is because of an increase in household real income, which has allowed some households to beef up savings. Household income increased by 1.8% mainly because of increases in wages, especially in the services sectors.
They are also saving rather than spending as they anticipate mortgage renewals at much higher rates. About half of households have not yet renewed their mortgages during this rate hike cycle. In the next couple of years, mortgage interest payments will continue climbing.
The takeaway
The Bank of Canada might choose to wait another month to cut rates, given April’s strong jobs report and wage growth, but that would keep the policy rate unnecessarily restrictive. Even with multiple rate cuts this year, the real interest rate will remain restrictive enough to restore price stability.
