Canada’s economy grew at an annualized rate of 3.7 per cent during the first quarter as consumer spending more than made up for a slide in exports.

“Consumers were the star of the show,” said Brian DePratto, senior economist with TD Economics.

Exports were a weak spot during the quarter, slipping at an annualized rate of 1.3 per cent. But domestic demand grew at an annualized rate of 4.7 per cent. A big push came from household spending on goods, up 4.3 per cent.

Indeed, Canadians spent so much they triggered a drop in the personal savings rate to 4.3 per cent, down from 5.3 per cent in the prior quarter. “It seemed that Canadians still can’t shake their debt habit, as nominal household expenditures outpaced disposable income growth,” DePratto said.

The first quarter result was a slight disappointment relative to a consensus forecast that Canada’s first quarter gross domestic product would top 4 per cent. The Q1 growth was also just shy of the 3.8 per cent gain that had been forecast by the Bank of Canada.

Yet the data still points to an economy that is rapidly picking up the slack left by the oil price downturn. The Q1 GDP number improves on average growth of 3.45 per cent in the two prior quarters.

“Even with some expected cooldown in the next few months, this still leaves the Canadian economy expanding at an underlying pace well above any other major economy at this point — quickly reversing the underperformance of the Canadian economy after the oil shock,” said Douglas Porter, chief economist with BMO Financial Group.

March turned out to be a bit of a surprise. Statistics Canada said the country’s economy expanded 0.5 per cent in March, which was much better than the 0.3 per cent most economists had expected for the month.

Domestic consumption drove growth during the quarter, with exports of goods and services taking a bit of a slide.

“Canada’s economy is humming along at a solid pace, and that has to be the lead for any story on the Q1 GDP numbers,” said Avery Shenfeld, chief economist with CIBC World Markets Inc. “We’re making solid progress in eliminating earlier disinflationary slack and getting back to full employment. We’re back.”

Not everyone is convinced. In a report released Wednesday, the International Monetary Fund said Canada’s economy could grow 2.5 per cent during 2017, and will struggle to beat 2.0 per cent after that.

The IMF raised concerns about Canadian business investment, non-energy exports, the country’s housing market and labour productivity. “Collectively, they raise uncertainty about the durability of the Canadian recovery,” the IMF report states.

While it has lagged in recent memory, business investment was one of the highlights of Canada’s Q1 GDP report. Business investment increased at one of the highest rates in years, up 10.3 per cent.

“Business investment has been a missing ingredient from earlier improvements which were driven largely by stronger household expenditures,” said Nathan Janzen, senior economist with RBC economics.

Craig Alexander, chief economist with the Conference Board of Canada, said he was impressed by the broad-based strength he saw in the first quarter numbers. But he said he was particularly thrilled to see a pick up in business investment.

“One of the things that I’ve been warning about for quite some time was the fact that business investment in machinery and equipment, particularly in the non-research sector, was actually running below the rate of depreciation. And so finally we got a piece of good news,” he said. “The weak business investment that we’ve had up to this point is actually a big constraint in terms of our medium term growth forecast.”

Financial Post
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