Quick take

Solid First Quarter Growth but Murmurs of a Recession Are Growing

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  • Canadian real GDP grew by 0.7 per cent in March. The result was slightly higher than Statistics Canada’s preliminary estimate and marks a tenth consecutive month of GDP growth. Meanwhile, the economy expanded by 0.8 per cent in the first quarter of 2022, a third consecutive quarterly gain.
  • As the effects of the Omicron-driven wave subsided and restrictions were lifted, client-facing industries expanded. Among these, accommodation and food services (+10.9 per cent) posted impressive gains. Elsewhere in the economy, both construction (+1.2 per cent) and manufacturing (+0.9 per cent) recorded notable growth. Meanwhile output in both wholesale (–0.7 per cent) and retail trade (–0.6 per cent) sectors declined.
  • Resurgent employment numbers in February and March drove up the aggregate level of wages and salaries. Despite higher household spending, particularly on services, the household savings rate rose to 8.1 per cent, supported by higher disposable income. As a whole, services-producing industries grew by 0.6 per cent.

Key Insights

Rising energy prices saw Canada’s terms of trade (the ratio of price of exports to price of imports) improve for the second consecutive month. Underpinning the improvement was the continued rise in energy prices, spurred by the invasion of Ukraine by Russia in February. While rising energy prices increases the value of Canada’s exports, households and firms must also bear higher costs associated with daily activities such as transportation (both of people and goods) and heating. It is important to remember that low-income Canadians bear the brunt of higher energy prices.

The searing heat that characterized the Canadian housing market in 2021 appears to be cooling. Several factors are putting downward pressure on housing demand. Rising interest rates are increasing the cost of mortgages. Meanwhile, fewer pandemic restrictions mean consumers are increasingly redirecting spending to services while would-be-buyers are ever-weary in the face of low affordability in many regions across the country. Canada’s ambitious immigration plans will provide a counterbalance to this trend by supporting household formation, particularly in urban centres.

Amid rising interest rates, murmurs of a recession are growing. Persistent supply-side bottlenecks have resulted in some of the highest inflation in decades. As the Bank of Canada wrestles with rapid price growth, the subduing impact of rising interest rates on demand in the economy has raised fears of weakening growth and a heightened risk of recession. Yet the picture is far from clear. Canada’s labour market is performing remarkably well following an impressive employment recovery as well as recent early signs of rising nominal wage growth. Throughout the pandemic, spending by consumers has been a central pillar of Canada’s recovery. In the months ahead, the evolving sentiment of consumers will be key. Fears of a recession can erode consumer confidence, which can in turn, can hamper spending, raising the risk of a recession arising through a self-fulfilling prophecy.

Russian Invasion of Ukraine: Access the latest insights

Liam Daly

Liam Daly

Economist

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