(Bloomberg) -- A pullback in home and car purchases sapped Canada’s economic strength in the first quarter, though probably not enough to keep the central bank from raising interest rates.
Gross domestic product expanded at a 1.3 percent annualized pace in the January-to-March period, the slowest in almost two years, Statistics Canada said Thursday in Ottawa. The median forecast in a Bloomberg economist survey was for a reading of 1.8 percent, and output trailed even the lowest prediction.
The country’s dollar erased gains after the report, which contrasted with the Bank of Canada’s statement Wednesday, in which Governor Stephen Poloz signaled there’s now less need for caution in considering further interest-rate increases. However, economists see enough momentum heading into the second quarter to keep the central bank on track.
“We aren’t getting indications of a further slowdown in the second quarter,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “They are achieving what they want,” he said of central bank officials, and “they can still withdraw stimulus.”
The quarter ended with a monthly output gain of 0.3 percent for March, faster than the 0.2 percent median in a Bloomberg survey. There were also signs of strength in business spending, while exports rose for a second straight quarter.
Bank of Canada Deputy Governor Sylvain Leduc, speaking to reporters following a speech in Quebec City, said he found the data encouraging.
“What we’ve seen today in terms of national account numbers are really reassuring for us, reinforcing our views,” Leduc said.
The currency fell further after the U.S. said it would proceed with tariffs on Canadian imports of steel and aluminum. Futures trading still showed 75 percent odds of a rate increase at the central bank’s July meeting, little changed from Wednesday.
Some pullback in consumer spending may be a welcome development, after Poloz and other policy makers warned that debt-fueled consumption was overstretched. Investment in housing fell 7.2 percent, the most since 2009, as tougher mortgage rules took effect.
Spending on goods such as automobiles stalled after almost three years of gains, slowing overall expenditures to 1.1 percent, the least in three years.
The weakness in housing masked gains elsewhere that suggest healthy spending in the future, economists said. While growth in business expenditures on capital projects slowed to 3.5 percent, after taking out housing there was a 10.9 percent gain in non-residential structures, machinery and equipment.
And while export growth slowed to 1.7 percent, the 4.9 percent growth in imports suggests strong domestic demand.
The first quarter is seen as a turning point from three quarters of growth below 2 percent to a period of gains above that mark, creating further inflation pressure in an economy close to full output. There are other signs of tightness including record low unemployment and companies saying they are reaching their production limits.
“The Canadian economy clearly still has some gas left in the tank,” Brian DePratto, senior economist at Toronto-Dominion Bank, wrote in a research note. “We remain confident that economic growth will remain modestly above potential for 2018 as a whole. Accordingly, conditions will stay supportive of a Bank of Canada hike at its next meeting in July.”
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