Canada: A volatile first half of 2016 – Nomura

Charles St-Arnaud, Research Analyst at Nomura, suggests that after robust GDP growth in Q1, a correction in exports and the impact of the forest fires in Alberta should lead to a contraction in Canada’s Q2.

Key Quotes

“The Canadian economy grew by a 2.4% q-o-q ar. in Q1 2016. While strong, this was slightly disappointing and suggested the economy had less momentum going into Q2. The rebound in growth was mainly the result of a strong rebound in exports. A pick-up in consumer spending and residential investment also supported growth. However, the data released so far for Q2 suggest that growth will slow sharply to a -1.3% q-o-q ar, mainly owing to the forest fires and the resulting disruption to oil production.

The Bank of Canada (BoC) estimates that the disruptions from the forest fires should reduce growth in Q2 by 1.25pp, before rebounding in Q3. Moreover, the underlying growth momentum is weak. The recent trade data show that the rebound in exports in Q1 has been completely reversed, meaning that exports will subtract from growth in Q2.

Despite the modest job gains so far this year and weaker income growth, consumer spending should remain a major contributor to growth. Nevertheless, with oil prices remaining low and the decline in CAD increasing the cost of imported capital goods, we believe business investment could remain a drag on growth in 2016. The increase in fiscal spending announced in the latest federal boost, through infrastructure spending and a tax credit to low- and middle-income households, is likely to boost growth this year and next.”