Canadian Real GDP (February 2019)

February chill hits Canadian GDP

• Canadian economic activity contracted 0.1% month-on-month in February, falling a bit shy of market expectations of no change. The decline was fairly widespread, with just 11 of the 20 major sector groupings in expansionary territory.  
• The biggest drag on growth was again the mining, quarrying and oil and gas sector, driven lower by mining (excluding oil and gas), down 4.4%. Oil and gas sector output was down again in February, contracting 0.6%. The ongoing challenges of this sector, together with cold weather, sent activity in transportation and warehousing lower (-1.6%) driven largely by a 10.8% drop in rail transportation.
• Weather related impacts appear to have impacted real estate, with activity 0.2% lower. However, this drop was offset by a 1.5% rise in utilities output also attributable to cold weather. Interestingly, the construction industry eked out a second monthly gain despite the weather, driven by residential construction. 

Key Implications

• February's chilly weather didn't just make your commute worse, it also took a bite out of economic activity. We've seen quite a bit of volatility in the data recently, but the underlying message appears to be one of an economy still in the midst of a soft patch, but one driven by temporary factors. 
• It looks like we may be in the soft patch for a bit, particularly as trade and transportation sector data suggests little destocking in the energy sector despite production curtailments. This suggests a risk of another subpar performance in the second quarter. The good news, however, is that the underlying economic signals remain generally healthy, with construction activity rising for a second month, and some modest signs of life in investment. 
• With the February GDP data in hand, we track first quarter growth at 0.6% (q/q, annualized). This is only moderately higher than the Bank of Canada's view, and, as mentioned, Q2 may be held back a bit as well. This suggests that the Bank's conservative near-term forecast (see commentary), is likely to be more or less realized. This is fully consistent with their cautious messaging of late. As we discussed in TD Economics' latest Dollars and Sense, the Bank has set itself up for a long-term pause, and today's data only reinforce that the overnight rate looks set to stay at 1.75% for some time to come.

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