The Canadian economy ended 2018 treading water. GDP grew just 0.4% (q/q, annualized) in Q4. This fell a bit short of market expectations for a 1.0% gain. Nominal GDP, which includes price changes, fared even worse, down 2.7% as falling commodity prices dragged export prices lower. For 2018 as a whole, the economy expanded by 1.8%, owing in part to downward revisions to the figures for the first half of the year.
Discouragingly, final domestic demand contracted by 1.5%. This was the second consecutive contraction, punctuating a year-long pattern of deceleration. There was little in the way of redeeming factors. Non-residential investment fell for a third straight quarter (-10.9%) on widespread weakness across both structures and machinery and equipment spending. Residential investment was no better, falling 14.7%, as the drop in resales was joined by lower construction and renovation activity.
One notable bright spot in the investment picture was intellectual property products (+16.2%). Business spending on mineral exploration recovered, as did research and development, while software spending remained robust.
Elsewhere, household consumption decelerated to 0.7%, as spending on durable goods fell 2% (a third straight contraction). Government spending was down on the quarter (-0.6%), largely owing to a significant swing in spending on aircraft. Businesses built up inventories, which were $8bn higher, enough to add 1.5 percentage points to headline growth.
International trade was the big unknown going into today’s report as the U.S. government shutdown kept some of the monthly data out of analysts’ hands. With a full picture, it isn’t pretty. Net exports added to growth, but this was because imports (-1.1%) fell more than exports (-0.2%). In nominal terms, it’s the converse, but not in a positive way. Nominal exports fell 15% on the back of falling energy prices (the dollar value of energy product exports was down 64%). Nominal imports fell a more modest 2.4%.
On the income side, employee compensation was up 4.8%, while the capital share of income was down as the gross operating surplus fell 19.8% due mostly to the oil and gas sector. The combination of incomes and spending left the household savings rate up a tick at 1.1%, from 0.7% in the prior quarter (initially reported as 0.8%).
The monthly picture doesn’t offer a good hand-off into the next quarter. Economic activity declined by 0.1% in December, although there was some comfort in seeing that the declines were not broad based, as 13 of 20 major industries grew over the month. The drop can be put down to the goods sector (-0.7%). Utilities output fell 2.0%, owing to mild December weather, while construction output was down 0.9%. On the latter, Statistics Canada noted that this was the seventh straight monthly decline, a streak that has not been seen in almost three decades. Manufacturing output was down 0.3%. Conversely, despite a soft payrolls report, services activity was up 0.2% on relatively widespread gains.
Key Implications
Ouch. We were expecting a sub-1% report, but this report still managed to disappoint given the weak composition within the sectors. Put simply, it is never a good sign when an inventory build and import contraction are the factors keeping growth above water. Deeper than anticipated declines in investment led to a sizeable drop in final domestic demand, which is down for a second straight month in a clear sign of a weakened underlying trend.
Brace yourself. Things are probably going to get worse before they get better. The monthly GDP data suggests little momentum heading into 2019, and the impact from mandatory oil curtailment in Alberta will deepen within the Q1 GDP data, shaving around a point off of Q1 growth. This places even more burden on other sectors to step up, particularly the household side in spending and housing, the two areas absorbing the greatest weight from past monetary and macroprudential policy changes. The job and income side of that equation remains impressive, as does strong fundamental demand from an upward population swing. We are keeping the faith in households producing a positive print in that quarter.
The pieces of this puzzle lead to a picture that, even abstracting from energy-sector shocks, sends a message to the Bank of Canada that past rate increases when combined with macroprudential policy have been more dampening than expected. With inflationary pressures still missing in action, we may indeed be approaching the period Governor Poloz calls being “home” on the rate-policy side. The true test will come when 2019Q2 data becomes known on the resiliency of households and businesses alike.
