Real GDP Flat in March but Accelerates in the First Quarter of 2023

  • Canadian real industry GDP was essentially unchanged in March, following a 0.1 per cent increase in February. The data show that in the first quarter of 2023, Canadian real GDP by industry rose 0.7 per cent, growing at its fastest pace since the second quarter of 2022.
  • In March, output rose in 12 of 20 industrial sectors. In the goods economy, the increase was led by the mining, quarrying, and oil and gas extraction sector, increasing by 1.2 per cent in March, marking a third consecutive monthly gain. Meanwhile, across the services industries, growth was essentially unchanged. The public sector and the real estate and rental and leasing sectors saw increases, but these were offset by contractions in accommodation and food along with retail and wholesale trade activity.
  • Despite higher interest rates, household spending rose for goods, 1.5 per cent, and services, 1.3 per cent, in the first quarter of 2023. Expenditures on durable goods increased by 3.3 per cent and were driven by motor vehicles, including new trucks, vans, and sport utility vehicles. Service spending was led by food and beverage services, plus travel increased in the first quarter by 6.8 per cent, compared with a 3.3 per cent decrease in the previous quarter.
  • Exports of goods and services also helped push real GDP up, rising by 2.4 per cent in the first quarter of 2023, following a 0.5 per cent increase in the fourth quarter of 2022. Imports also edged up by 0.2 per cent in the first quarter of 2023, following a 3.3 per cent decline in the fourth quarter of 2022, led by higher imports of crude oil and crude bitumen.

Key Insights

Today’s releases of industry GDP and income and expenditure show that Canadian GDP performed above expectations in the first quarter of 2023. A combination of better-than-expected household spending, a rise in exports, healthy job gains, and high levels of immigration have all contributed to a rise in output for the first quarter of this year. The population increase also helps to ease labour supply pressures and increase domestic demand. While the monthly change in March was flat and seems to be heading in the direction of a slowing economy, it is clear that Canada appears to be avoiding a major downturn. This all bodes well for Canada’s economy but can complicate the picture for the Bank of Canada.

The Bank of Canada, after a series of interest rate hikes in 2022, has held its overnight lending rate at 4.5 per cent since March. The trouble is that the economy may not be cooling down fast enough, as employment remain resilient, and the inflation rate unexpectedly increased in April, jumping to 4.4 per cent. As a result, the Bank will likely continue its wait-and-see approach in June as it digests more data, but forecasts still point to a slowdown in the coming months. In addition, strong headwinds are happening south of the border as the U.S. is still dealing with tightening credit caused by the banking crisis, continued rise in interest rates, and the likely debt-ceiling deal reached, which would set in a two-year spending cap on the federal government.

One major concern for long-term growth in Canada is the lack of business investment. Real business investment continued its decline seen in the last quarter of 2022, posting a decline in the first quarter of this year led by a drop in machinery and equipment investments. After a significant plunge in investments caused by the pandemic, investments have still not fully recovered. With a recession looming, Canada’s economy cannot afford another period of slow investment spending. Weak capital investments are one reason Canada’s productivity has not kept pace with the U.S. and one of the key reasons why the OECD predicts Canada will be one of the worst-performing countries in terms of real GDP over this decade. Continued weak business investment has been a story in Canada for quite some time now, and if it continues, it could have long-term implications impacting its competitiveness.