Canada retained its crown as growth champion of the Group of Seven industrialized nations in 2003 Q1, but there are some very significant clouds gathering overhead, BMO Nesbitt Burns Inc. said Friday following the release of first-quarter GDP that showed the Canadian economy growing at a 2.4% annual rate.

“Q2 is poised for a major cool-down, and a second-half rebound hinges crucially on a turnaround in U.S. activity,” said Sherry Cooper, BMO chief economist.

Cooper said the 2.4% increase, up from the unrevised 1.6% rate in the prior quarter, was almost exactly in line with expectations for Q1.

The good news, she said, was that domestic demand was solid. “Housing was typically robust, government and consumer spending were healthy, and business investment clawed back into the plus column,” Cooper said. “Overall, final domestic demand rose at a 3.9% annual rate, the best performance in two years.”

The bad news is that net exports were hurt by soft U.S. demand, and are poised to suffer from the soaring Canadian dollar. Q1 growth was helped heavily by an unsustainable rise in inventories, which alone added more than two percentage points to growth.

“The starting point for Q2 is weak, with GDP flat in March, and probably down in April due to SARS, bad weather, and still-weak U.S. demand. The savings rate dropped to just 2.6% from 3.2% in Q4 and 4.2% for all of last year. Finally, there were downward revisions to the first three quarters of 2002, taking some shine off last year.”