Canada's Q1 gross domestic product didn't just underperform expectations as it was "outright terrible," falling by 0.1% quarter-over-quarter annualized, said Rosenberg Research after Friday's GDP data.
The consensus expectation was for a gain of 1.5%, due largely to an expected rebound in inventories after a large drawdown in Q4. In fact, inventories did bounce, adding a full 4.3 percentage points to GDP growth in the quarter.
Yet, GDP still fell, noted Rosenberg Research. Piling on the bad news, Q4 GDP growth was revised to a 1.0% contraction from a 0.6% decline.
In the quarter, the biggest headwind was net trade, which carved 3.8 percentage points off growth. On the plus side, the only one worth mentioning is the small positive contribution from household consumption, up 0.8 percentage points.
Though it was mostly bad, the report was not all bad, stated Rosenberg. Within the business investment category, there were positive contributions from machinery and equipment and intellectual property products. Given Canada's lackluster productivity performance and years of underinvestment in machinery and equipment and intellectual property products, these are hopeful signs. They were among the few bright spots.
On a year-over-year basis, GDP slipped into negative territory. The first reading below the water line since late 2020. Last year at this time, GDP was running an annual growth rate of over 3.0%. A testament to the headwinds the Canadian economy has been facing.
Rosenberg thinks it's important to dig into the performance of the household sector here. In the quarter, household consumption rose by +1.5% annualized, while posting a +3.5% annualized gain in nominal terms. It isn't the inflationary part of the story that is really important, though. It is how Canadians even managed to consume at the pace they did in the quarter.
To do so, households had to turn away from savings. The household saving rate fell to 3.5% of personal disposable income, from 3.7% in Q4. The household savings rate was 5.9% in Q3 2024. Since then, it has been downhill as Canadians have attempted to offset a slowdown in the job market and a series of shocks, including abrupt shifts in United States trade policy and the more recent energy price shock, by shunning savings.
Canadians are now essentially spending all of their disposable income as they face a significant squeeze. That can only go so far, added Rosenberg.
Basically, Friday's data suggest that Q1 was a "mess" for the Canadian economy. There are signs, however, that things might improve from here, according to Rosenberg. Statistics Canada's preliminary estimate for April GDP is for a gain of 0.4% month over month, led by mining, manufacturing, and transportation.
Based on this April estimate, Rosenberg's initial estimate for Q2 GDP is 1.5% quarter-over-over annualized. It might be only a modest rebound in economic activity, but it does suggest that the "bleeding" will stop.