Canada first quarter GDP weaker than expected but March shows sign of recovery

OTTAWA (Reuters) - The Canadian economy expanded at an annualized rate of just 0.4% in the first quarter, Statistics Canada data showed on Friday, although market participants were heartened by signs of a strong recovery in March.

FILE PHOTO: Condo buildings line both sides of Gardiner Expressway in downtown Toronto, Ontario, Canada on August 31, 2017. Picture taken on August 31, 2017. REUTERS/Hyungwon Kang

Analysts in a Reuters poll had predicted annualized first quarter growth of 0.7% as the economy battles low oil prices and global trade tensions. The Bank of Canada is not predicting a recovery until the second half of 2019.

Gross domestic product in March grew 0.5% from February - the largest increase since the 0.5% gain seen in May 2018 - on widespread improvement across both the goods- and services-producing sectors.

“The one major piece of good news is the very strong result in the monthly number for March ... we’ve got another sign that the economy had gained some momentum at the end of the quarter,” said Doug Porter, chief economist at BMO.

Although household spending and business investment in machinery and equipment grew in the first quarter from the fourth quarter of 2018, this was moderated by a decline in exports and investment in housing.

The Bank of Canada forecast on April 24 that annualized first-quarter GDP would be 0.3%. The central bank held interest rates steady as expected on Wednesday, saying there was evidence the economic slowdown was temporary.

Most analysts think the central bank will not raise rates again this year.

“I still think it’s very early to be talking about rate hikes but it does greatly reduce the chance of rate cuts in 2019, absent a significant escalation in global trade risks,” said Robert Both, macro strategist at TD Securities.

The Canadian dollar weakened slightly on the news, dipping to C$1.3550 to the U.S. dollar, or 73.80 U.S. cents.

U.S. President Donald Trump on Thursday rattled financial markets by threatening to impose tariffs on Mexico unless it did more to stop illegal immigration. At the same time, Washington is pressing for ratification of a new continental trade pact with Canada and Mexico.

Derek Holt, vice president of capital markets economics at Scotiabank, said the quarterly GDP data was a “good news bad news” story.

“It’s positive if everything else wasn’t skidding into the ditch,” he said in a phone interview.

Separately, Statscan said Canadian producer prices increased by 0.8% in April from March, driven mainly by higher prices for energy and petroleum products and pork.

Additional reporting by Fergal Smith and Nichola Saminather in Toronto and Steve Scherer in Ottawa; Editing by Bernadette Baum