Highlights:
- Canadian Q4/18 GDP increased just 0.4% — softer than expectations for a 1.0% increase.
- On a monthly basis, GDP fell 0.1% in December, the second straight 0.1% decline and the third in the last four months.
- Much of the softening can be traced back to what we expect will ultimately be transitory weakness in the oil & gas sector, although household spending growth also continued to slow.
Our Take:
The 0.4% increase in Q4 Canadian GDP was down from 2.0% in Q3 and the smallest since Q2 2016. A lot of the weakness can still be traced back to softening in the oil patch in the wake of lower oil prices and announced mandated production cuts in Alberta. Investment spending was down 11% after a similar-sized drop in Q3 — likely in large part because of a pullback in the oil & gas sector that was earlier flagged by a big drop in drilling activity. Looking into the industry breakdown, activity in industries closely associated with oil & gas extraction fell ~8% at an annualized rate in Q4 as a whole. Yet growth excluding the oil & gas sector was also still only up 1%. Residential investment posted its largest decline since Q1 2009, as new construction spending fell, and consumer spending growth slowed to just 0.7% in Q4. Business investment growth was revised lower in earlier quarters as well, to leave a soft-looking 1.7% increase in 2018 as a whole.
Provided the recent recovery in oil prices holds, we expect the softening in activity in the oil & gas sector will ultimately prove temporary, although will still persist into Q1/19. Drilling rig counts have already bounced back somewhat from December lows. While household spending will remain weaker than in recent years, Q4’s very slow pace is unlikely to be sustained. Labour markets have still looked solid, and one of the (few) bright spots in today’s data was a 3.3% increase in household disposable income in Q4. But added to already slowing household debt growth and stable inflation trends, soft economic data over the winter is just another reason for the Bank of Canada to hold off on further rate hikes for now.
