Canadian real GDP grew 2.6% (quarter-on-quarter, at an annual rate) in the fourth quarter. With the year’s data now in hand, Statistics Canada estimates that the Canadian economy expanded by 1.4% in 2016. In nominal terms, fourth quarter growth was 7.0% (resulting in an expansion of 2.0% over 2016 as a whole).
Leading overall growth was net trade, with imports pulling back 13.5%, as an imported oil production module fell out of the data. Exports recorded a modest gain (+1.3%), continuing their momentum from the previous quarter.
On the domestic front, it was all about the consumer, as household spending rose 2.6%, supported by a healthy bounce-back in durable goods spending (+8.1%) after two quarters of contraction. Residential structure investment was also strong, up 4.8% on gains in new construction and renovations.
It was a different story for business investment. Machinery and equipment investment disappointed expectations, falling 10.3% on a pullback in the industrial machinery and equipment subcategory. Non-residential structures investment fell 21.7% as the one-off gains in the third quarter were reversed.
Monthly GDP for December came in at a healthy clip, up 0.3% month-on-month. The goods-producing side of the economy was up 0.5% as a return to seasonal weather helped the utilities sector, and construction activity remained healthy for a second month in a row. On the service side of the economy (+0.2%), weak retail trade figures (-1.0%) were offset by solid gains among wholesalers (+1.2%), professional services (+0.5%), and others as only 2 of the 15 major industries declined.
Key Implications
There are worse ways to end a year. Canadians opened their wallets both at stores and construction offices, delivering a solid fourth quarter economic performance. That said, the fly in the ointment continues to be business investment. While some of the pullback in this sector is related to the installation of a sizeable module for the Hebron oil project in the previous quarter, other areas of business investment disappointed, with continued weakness in machinery and equipment investment, as well as intellectual property products (which includes mineral exploration).
Cautious optimism remains warranted. The solid December monthly GDP figure points to good momentum heading into 2017, while rises in Canadian rig counts suggest that investment in the oil and gas sector may be starting to bottom out. All told, despite undiminished external risks to the outlook, we continue to expect a healthier pace of growth in 2017 and 2018.
Despite today’s GDP report coming in ahead of their expectations, it is likely to have little impact on the Bank of Canada’s interest rate path. As emphasized in yesterday’s communique (see our commentary), underlying inflationary pressures are weak, reflecting still sizeable slack in the Canadian economy that, in our view, will take some time to be absorbed. This means that even with solid growth numbers, significant upward pressure on inflation is not likely to materialize. At the same time, the current levels of the Canadian dollar and longer-term borrowing rates are not helpful. All of these factors point to a Bank that is likely to remain on hold for some time to come.
