Housing Drove the Economic Expansion in Q1
Residential investment is a component of the Gross Domestic Product accounts and is technically called ‘gross fixed capital formation in residential structures’ by Statistics Canada. Investment in residential structures is comprised of three components: 1) new construction, 2) renovations and 3) ownership transfer costs. The first two components are obvious.
The home-resale market’s contribution to economic activity is reflected in ‘ownership transfer costs.’ These costs are as follows:
- real estate commissions–including realtors and mortgage brokerage fees;
- land transfer taxes;
- legal costs (fees paid to notaries, surveyors, experts etc.); and
- file review costs (inspection and surveying).
Growth in housing investment was broad-based. New construction rose 8.7% (quarter-over-quarter), largely driven by detached units in Ontario and Quebec. Ownership transfer costs increased 13.1%, with the rise in resale activities. Working from home and extra savings from reduced travel heightened the demand for, and scope of, home renovations, which grew 7.0% in the first quarter.
Strength in oil and gas extraction, manufacturing of petroleum products, and construction industries led to a higher gross operating surplus for non-financial corporations (+11.5%). Higher earnings from commissions and fees bolstered the operating surplus of financial corporations (+3.9%), coinciding with the sizeable increases in the value and volume of stocks traded on the Toronto Stock Exchange (TSX).
Most aspects of final sales were solid in Q1, with consumers a bit stronger than expected (2.8% a.r.), government adding (5.8%), and net exports also contributing. In contrast, business investment was one real source of disappointment, with equipment spending surprisingly falling. But the biggest drag came from a drop in inventories, with this factor alone cutting growth 1.4 ppts in Q1, and versus expectations, it could add a touch. The good news is that this should reverse in Q2, supporting activity in the current quarter.
On the monthly figures, there were few big surprises. March’s initial flash estimate of +0.9% was nudged up in the official estimate to +1.1% as the economy began to re-open from the second wave. Tougher COVID public health rules slammed the brakes on Canada’s economy in April. Statistics Canada estimates gross domestic product shrank 0.8% in the month, representing the first contraction in a year and a weak handoff heading into the second quarter. April may well be followed by a soft May. Even so, we still expect a strong June will keep Q2 roughly flat overall and look for robust Q3 growth.
In many respects, Q1 data is ancient history. We know with the resurgence in lockdowns, growth in Q3 will at best be flat. In the hopes that vaccinations will accelerate and COVID case numbers will continue to fall across the country, Q4 will likely see a strong resurgence in growth.