Ahead of the highly watched and anticipated BoC rate decision today, first-quarter GDP surprised to the upside yesterday coming in at 6.1%
QoQ, better than the 5.9% pencilled in by analysts and the Bank’s own 5.8% estimate. The Q1 result follows the 4.9% jump in Q4, which was revised down slightly. March GDP was also better than expected, rising 0.6% MoM, which means the momentum heading into Q2 is a respectable 2.0% annualized (and we noticed that most Canadian sell- side economists stand ready to upgrade their Q2 forecasts).
Final domestic demand was very respectable coming in at 4.7%, slightly lighter than the 5.0% Q4 tally. Most details were solid but one surprise was the increase from inventories, which accounted for 2.4ppts or 40% of the gain in total GDP — most economists have been saying that the boost from inventories would come later in the year. What caught our eye was the 23.6% jump in residential investment QoQ, which followed the 26.3% rise in Q4. Housing-related spending was also strong, with the 4.4% jump in total PCE getting a major boost from the 10% QoQ increase in furniture and furnishings category — together with residential construction, we calculate that this accounted for 30% of the increase in GDP. In fact, to add a bit of perspective, housing and related spending plus inventories accounted for 70% of total GDP growth in Q1.
While the momentum heading into Q2 is indeed strong, we believe that we will see a major slowdown in activity in the second half of the year. We have seen signs already that housing activity is slowing especially in the face of higher mortgage rates in Q2 and this will continue into H2. We could see some more business inventory building in this quarter but it’s highly unlikely that we will see inventories provide such a boost as it did in Q1 beyond Q2. Without housing and inventories to pack such a powerful punch, we expect GDP to grow at much more modest pace for the remainder of the year.
Via David Rosenberg’s Breakfast with Dave 06/01/2010
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