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Canada's 1st-Quarter GDP Falls Short of Expectations -- Update

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05/31/2018 | 09:54am EDT

By Kim Mackrael

OTTAWA -- Canada's economy expanded at a slower pace than expected in the first quarter, as housing investment dropped sharply following the introduction of tougher mortgage rules.

Weaker consumer spending and lower exports of non-energy products also weighed on growth.

Canada's gross domestic product, or the broadest measure of goods and services produced in an economy, rose at a 1.3% annualized rate in the first quarter of 2018, to 1.877 trillion Canadian dollars ($1.455 trillion), Statistics Canada said Thursday. The gain matched an earlier forecast by the Bank of Canada, but fell short of market expectations for a 1.9% advance, according to economists at Royal Bank of Canada.

In comparison, the U.S. economy advanced 2.2% in the first three months of 2018.

The Canadian data come one day after the Bank of Canada kept its benchmark interest rate on hold at 1.25%. Economists and traders interpreted an upbeat statement from the central bank, issued alongside its rate decision, as a sign that a rate increase is likely at the next policy announcement in July.

The Bank of Canada lifted interest rates three times between last summer and January 2018, after keeping them at ultralow levels for years. Policy makers have indicated that they plan to move rates higher but say they will do so gradually, in part because heavily indebted households may be more sensitive to rising rates.

Paul Ashworth from Capital Economics said the unexpectedly weak data means a July rate increase "looks a lot less of a done deal" than it did when the Bank of Canada released its latest statement on Wednesday.

"After a strong first half of 2017, GDP growth has now been slightly below the economy's potential rate for three consecutive quarters," Mr. Ashworth said. "That doesn't seem like the environment that would require higher interest rates."

Household spending advanced 0.3% in the first quarter, the slowest pace since the beginning of 2015. While consumers spent more on services, spending on goods was flat, following 11 straight quarterly gains.

Also moderating growth in the quarter was a steep drop in housing investment, which fell 1.9% for the biggest quarterly decline in nine years. Housing investment advanced 3.2% in the fourth quarter of 2017, ahead of new mortgage-financing rules that came into effect in January.

Export volumes rose 0.4% in the quarter, down from a 1% gain in the previous three-month period, on lower exports of non-energy products.

On the positive side, nonresidential investment expanded in the first quarter, led by a 4.2% gain in machinery and equipment investment, and a 3.3% rise in intellectual-property products.

On a month-over-month basis, GDP rose 0.3% in March, led by gains in the mining, quarrying and oil and gas extraction sector. Market expectations were for a 0.2% advance in the month.

Write to Kim Mackrael at kim.mackrael@wsj.com

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