Red hot growth in the first half of the year gave way to only tepid growth in the second half in Canada in 2017, but for the year as a whole it was the biggest increase in GDP growth since 2011.
Soft Second Half
Real GDP growth in Canada came in at a 1.7 percent annualized rate in the fourth quarter. Not only was that a bit below expectations, but the initially reported growth for Q3 was revised a bit lower as well. In short, after growing faster than the rest of the G7 in the first half of the year, Canada’s economy slowed more than initially reported in Q3 and grew less than expected in Q4.
When we look into the underlying details, there is evidence of some of the factors we have cited among our top worries for Canadian growth. Specifically, there were signs of fatigue in consumer spending and a softer pace of inventory investment. Consumer spending expanded at just 2.1 percent, the slowest pace of expansion all year. Inventories are still building but at a more modest pace, the result of which was a full percentage point drag on headline GDP growth.
Looking forward, we remain concerned about elevated household debt levels and the run-up in home prices that have occurred alongside the leveraging process over the past several years (middle chart). The Bank of Canada may be somewhat less inclined to raise rates quickly after this report, but the eventual normalization of interest rates could further hamstring household spending. On the inventory side, stockpiling in 2017 may result in further drags on growth in 2018 as a more normal pace of inventory building would act as a governor on the pace of broader GDP growth.
Over time, we also expect to see a retrenchment in business fixed investment, though we saw no signs of it here in the fourth quarter despite three straight periods of expansion earlier in the year. Remarkably, not only did business spending stay positive, it actually posted its fastest pace of expansion all year, growing at a 9.5 percent annualized pace. The question going forward is the extent to which this strength reflects some pent-up demand after business spending suffered during the low oil-price environment of 2015 and early 2016, or whether the pick-up is a function of a re-emergence of animal spirits and the gathering momentum of global growth.
Down Where the Trade Winds Play
It has been a rather consequential week for North American trade dynamics. Not only were the latest rounds of NAFTA negotiations underway this week in Mexico City, there was also the announcement of steel and aluminum tariffs rolled out this week by the White House. As of this writing, it is unclear whether Canada will receive an exemption on the tariffs. Our analysis finds that Canada supplies roughly 20 percent of imported steel and iron to the United States, so clearly without an exemption the new U.S. tariff would be bad for Canadian exports. For the fourth quarter anyway, Canadian exports expanded at a 3.0 percent pace, although with imports growing faster, trade was actually a drag on growth in the fourth quarter.
