- The Q4 increase was greater than the 2.0% expected going into the report and followed an upwardly revised 3.8% increase in Q3 (previously reported as 3.5%).
- December GDP rose a solid 0.3% that was in line with expectations though it followed an upwardly revised 0.5% increase in November (0.4% previously).
Activity in the fourth quarter received a significant boost from consumer spending rising 2.6% with a solid increase in the durables component reflecting auto sales being at record highs. Spending in the quarter was helped by wages and salaries rising 5.6%. This income boost was also likely a factor sending residential investment up a strong 4.8%. Government spending was up 2.1% which reversed the 1.9% decline in Q3. A main offset to these increases was a 17.4% plummet in non-residential investment that occurred despite indications of profits rising 28.8%. The modest increase in capital expenditures in 2017 reported early this week provided little evidence these profits are being used to finance any future investment. As expected, net exports were a sizeable 5.2 ppt. add to Q4 GDP growth though this largely reflected a 13.5% plummet in imports. Exports rose a modest 1.3%. The quarter saw a sizeable drawdown in inventories that subtracted 2.8 ppt. from growth.
Our Take:
The Q4 growth rate implies a strengthening pace of activity after the wide swings in the second and third quarters which saw an average increase of 1.3%. As well the Q4 growth rate surpassed the 1.5% increase that the Bank of Canada projected in its January forecast. The central bank acknowledged in Wednesday’s policy statement the likelihood of Q4 growth coming in stronger than expected though maintained the economy was performing generally in line with their expectations of sustained above-potential growth. The composition of quarterly growth and the monthly detail both augur well for above average growth continuing in Q1. As long as this growth profile is confirmed in the data over the near term, the central bank is expected to maintain the current overnight rate of 0.50%. Our forecast does assume that the attendant absorption of economic slack will eventually return the Bank of Canada to tightening mode though not until the second quarter of next year. Also contributing to the delay in tightening in the near term are the downside risks to growth should the Trump Administration opt for protectionist trade measures. This factor was likely a main element of the Bank of Canada reference to "significant uncertainties" in Wednesday’s policy statement that was a factor in leaving the overnight rate unchanged.
