Canadian GDP slipped to 2.4% in the first quarter, but economists say that the details are generally strong. They see rates tightening before the end of the year as a result.

Canadian real GDP rose at a 2.4% annual rate in Q1, down from 3.3% in the prior quarter. BMO Nesbitt Burns Inc. says that this was above expectations of a 2.0% rise, although the prior reading was revised down from 3.8%. Final domestic demand was solid, “rising at a hearty 4.8% pace, as consumer spending had its best quarter in almost four years,” Nesbitt said in a report.

TD Bank said the Canadian economy may have posted only a lacklustre gain in the opening quarter of 2004, “but make no mistake about it — the details of this morning’s GDP report looked like one great big silver lining. Virtually all of the softness was due to a dramatic decrease in the pace of inventory accumulation, not a lack of demand… the burst in demand was satisfied through a decrease in inventories rather than increased production, hardly a sign of underlying economic weakness.”

Consumer spending was up 5.5%, and residential construction jumped14.4%. “And, although business investment in non-residential structures recorded yet another quarterly decline, spending on machinery and equipment increased at a respectable 6.5% annualized rate,” TD says. “Finally, exports managed to squeeze out a healthy 6.3% annualized gain — a sure-fire sign that strong U.S. growth and rising commodity prices are providing a huge offset to the lingering drag from the stronger loonie. In sum, no matter how carefully one digs through the nooks and crannies of the first-quarter data, there was hardly a true weak spot to be found.”

Nesbitt also notes that monthly GDP for March was strong, up 0.7%, “following lacklustre flat readings in the first two months of the year. GDP in the latest month was up 2.5% from year-ago levels – getting closer to the Bank of Canada’s 3% estimate of growth potential.”

CIBC World Markets also took note of the monthly stats as a way of assessing near-term prospects. “It’s worth paying attention to the monthly GDP figures that can often get lost in the tidal wave of quarterly national accounts data. On that score, March’s broadly based 0.7% surge provides a great lead-in to second quarter growth. We’d expect monthly output gains to average between 0.2-0.3% in the April-June trimester, which combined with the March head start, would propel Q2 growth to 4% or better.”

Nesbitt agrees that GDP is probably headed for something closer to 4% in Q2. “In addition, the upward revisions for all of 2003 suggest that the economy may have slightly less slack than the Bank of Canada previously believed. Despite so-so Q1 growth, the Bank could be hiking rates before the end of 2004,” Nesbitt concludes.

“Although the first quarter will have been a bit below the Bank of Canada’s expectations, the second is likely to be stronger, leaving our call for October as the moment for the first tightening intact,” TD says.