Canada’s GDP growth for both March and Q1 2017 will be released Wednesday. Strong results are a given, with March witnessing increases in retail sales volumes, wholesalers’ volumes, hours worked, housing starts and manufacturing shipment volumes (the last increase was small, at 0.2%).
In an economics update, Derek Holt, vice-president and head of capital markets at Scotiabank, estimates GDP growth of 0.4% month-over-month and of just under 5% in Q1 over Q4.
If he’s correct, “then Canada will have led the world’s advanced economies on growth to start 2017,” he says. It’s been almost six years since the Canadian economy grew at such a pace.
Once the GDP numbers are revealed, tracking for Q2 GDP growth is sure to begin. Is Canada’s hot growth sustainable in Q2?
“Not all units of GDP are equivalent,” says Avery Shenfeld, managing director and chief economist of CIBC World Markets, in an economics update. He adds that “the degree of any pullback in growth will be one factor in whether the Bank of Canada can or should wait until 2018 before hiking rates.”
First quarter GDP was largely fuelled by consumer spending, but that’s not sustainable if spending came from a reduced savings rate as opposed to after-tax income gains, he says.
Another unit of GDP on Shenfeld’s radar is whether inventory build is in manufacturing or retailing, the former indicating more of a drag on growth. “If retailers have stocked up on imported cars or clothing, that will mean lighter imports the following quarter, not reduced Canadian GDP,” he says.
He also points to business investment spending, which indicates business confidence. Along with exports, it’s an area that must improve before the Bank of Canada raises rates, he says.
Holt says the hand-off numbers at the beginning of Q2 set in place “mixed momentum arguments that make it far too early to tell how Q2 will shape up, which leaves the debate […] data-dependent.”
He cites such examples as April’s decline in housing starts after a March spike, and an ostensibly strong rise in hours worked that’s contingent on productivity data.
As the realities of a strong Canadian GDP become evident — and as housing concerns wane — it’s time for investing in domestic stocks. With TSX stocks priced more cheaply than their U.S. counterparts, they should outperform in the second half, says Nick Exarhos, director at CIBC World Markets.
Fotios Raptis, senior economist at TD Bank, agrees in an economics update that forecasts 2% GDP for Q2.
“With excess capacity quickly being absorbed, a rate hike by the BoC is likely to happen as early as 18Q2,” says Raptis, which, along with firming energy prices, should help lift the loonie. “The bid on the Canadian dollar following Wednesday’s monetary policy statement suggests maybe the time has come to buy Canada.”
Also read: Short-term upside for the loonie: Desjardins