Economy posts another weak quarter of growth, but shows signs of rebound [UPDATED]

OTTAWA—Canada’s economic expansion remained sluggish in the first three months of the year, giving the country its weakest back-to-back quarters of growth since 2015.

But stronger data for March—the final month of the first quarter—suggests Canada’s economy is in the process of bouncing back from its hibernation.

The economy expanded at an annualized pace of just 0.4% in the first quarter, slightly above a revised reading of 0.3% in the final months of 2018, Statistics Canada said Friday.

The numbers gave Canada its slowest two-quarter stretch of growth since an oil-price plunge caused the national economy to shrink over the first half of 2015.

First-quarter growth was held back by weak trade data. Imports increased 1.9% and export volumes dropped 1% for their first quarterly decrease since 2017, the report said.

Canada also saw a substantial contraction of 9.5% in its exports of farm and fishing products as well as a 2.8% drop in crude-oil shipments.

On the positive side, the strongest quarter of household spending in two years boosted growth. The increase included healthy numbers for purchases of vehicles and audio-visual equipment.

The economy also saw an 8.7% lift in business investments on equipment and machinery. The category, fuelled in part by significant investments in aircraft and other transportation equipment, saw its biggest jolt in 23 years, the agency said.

“Don’t let the headline fool you, this was a pretty decent GDP report,” TD senior economist Brian DePratto wrote in a report.

Looking ahead, the report’s month-to-month reading for March suggested strength headed into the second quarter. March posted a 0.5% increase compared with a 0.2% contraction in February.

The report said 16 of 20 industries posted growth in the month.

“That’s a very favourable way to leave the first quarter behind,” said Derek Holt, Scotiabank’s head of capital markets economics.

“We know the economy went through a soft patch at the end of 2018 and the beginning of 2019. But the evidence I’m reading here … is suggesting that we’re exiting all of that and rebounding quite nicely into the second quarter.”

The first-quarter reading was better than the Bank of Canada’s prediction of 0.3%. Economists surveyed by Thomson Reuters Eikon had expected on average growth at an annualized rate of 0.7%.

But bigger, widening concerns around global trade—including U.S. President Donald Trump’s new threat to impose tariffs on all Mexican imports—could derail Canada’s domestic progress.

Trump said he would slap a 5% levy on Mexico by June 10, unless it does more to stop migrants from Central America attempting to cross the U.S. border. He warned the percentage will gradually rise “until the Illegal Immigration problem is remedied.”

Related: Trump gets pushback on promise of new Mexican tariffs

The president’s threat could also spoil the ratification of the U.S.-Mexico-Canada Agreement.

On Thursday, Bank of Canada senior deputy governor Carolyn Wilkins said external trade risks are a “major preoccupation.”

Wilkins, who raised the concern before news broke about Trump’s threat against Mexico, warned the highly uncertain international trade environment—including the ongoing U.S.-China trade war—poses a threat for Canada.

She also listed trade disruptions such as Beijing’s new restrictions on key Canadian agricultural products. A diplomatic conflict has intensified in recent months, leading China to reject shipments of some Canadian goods, including canola.

The central bank, she said, is also monitoring the possibility of a trade feud between the U.S. and the European Union. Trump has threatened to apply tariffs on autos from the EU.

The Bank of Canada has stressed the domestic economic slowdown was temporary—a “detour.” It has predicted 1.3% growth in the second quarter and for expansion to pick up its pace throughout the rest of the year.

—With a file from The Associated Press