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Economy slows to worst quarter since 2012

By: Julian Beltrame, The Canadian Press

 | May 30, 2014 - 10:16 AM |
OTTAWA - Canada's economy suffered through its worst quarter in more than a year during the first three months of 2014, as activity slowed in many key sectors, particularly business investment.

Due in part to the unusually harsh winter, economic growth fell to a surprisingly weak 1.2 per cent annualized rate, the slowest quarterly pace since the fourth quarter of 2012, when the growth rate was 0.9 per cent.

As well, for the month of March, gross domestic product inched forward by only 0.1 per cent, suggesting a weak hand off to the second quarter.

Statistics Canada also revised downward the fourth quarter growth rate from the previously reported 2.9 to 2.7 per cent, and January's strong 0.5 per cent GDP reading was trimmed back to 0.4.

Still, it was better than what occurred in the United States, where the poor weather likely had an even bigger impact and the first quarter saw the economy contract by one per cent.

But the soft quarter in Canada still surprised markets and economists, who had been counting on a 1.8 per cent advance. Even the Bank of Canada — which has been rather bearish about the economy in recent months — predicted 1.5 per cent growth.

The Canadian dollar dipped 0.18 of a cent to 92.1 cents US on the release.

Economists called the number disappointing, but said it should be taken in stride given the weather-related tumble that occurred south of the border.

"Still, the mild downside surprise for growth will likely keep the Bank of Canada focused on the downside risks at next week's meeting, even with the recent upswing in inflation," said Doug Porter, chief economist with BMO Capital Markets.

"The fact that the Canadian dollar has been steadily grinding stronger for the past two months is an added reason for the Bank to continue sounding dovish."

Paul Ferley of RBC said he expected the soft patch will prove "transitory" and that with better weather, the second quarter GDP should rebound to three per cent.

For the central bank, the most disappointing aspect of the Statistics Canada report will be that business investment in machinery and equipment fell by 1.5 per cent from the fourth quarter, with spending on computers falling 4.1 per cent.

Bank of Canada governor Stephen Poloz has been calling on businesses to pick up their investment, particularly as profits have been strong, to improve productivity and take the economy into the next phase of the recovery.

The details of the report Friday were as weak as the headline.

Final domestic demand slid by 0.1 per cent in quarter-over-quarter comparisons, business capital formation fell 0.9, exports fell 0.6 and exports of goods fell 0.8, business construction in residential structures dropped 1.6 and new home construction decreased 1.5, while real estate activity plunged 6.4 per cent.

The major strength in the economy remained Canada's resource sector, particularly the oil patch. Mining and oil and gas extraction grew a robust 2.4 per cent in the first quarter over the previous quarter, while utilities increased by 1.2 per cent.

Overall, the services sector increased by 0.3 per cent quarter-over-quarter, while the goods producing industries increased by 0.6 per cent.

In a welcome development for governments, the agency said nominal GDP increased by 1.7 per cent over the previous quarter, largely because export prices rose by 5.3 per cent, the most in almost six years. Nominal GDP, which tracks the value of economic activity, is critical to tax revenues.

The agency also reported that the household savings rate improved, rising to 4.9 per cent from 4.8 per cent in the previous quarter, as disposable income increased at a slighter faster pace than household spending.

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