- The Canadian economy hit a virtual standstill at the close of 2019 as real GDP eked out a 0.3% annualized gain in the fourth quarter. This met both market and the Bank of Canada’s expectations. Growth for 2019 as a whole was 1.6%. Including price changes, nominal GDP gained a healthy 4.5% in the fourth quarter, helped along by a solid gain in services inflation. Nominal growth was 3.6% for the year in total.
- Headline growth was held back by a number of factors. Top of the list was a 5.1% drop in exports, on fairly widespread declines across both goods and services. This was offset slightly on an accounting basis by a 2.5% decline in imports – drops here were also widespread, and notably included lower inbound shipments of consumer goods, as well as industrial machinery and equipment.
- Another key contributor to the soft headline was a decline in private investment. All of the major categories recorded declines. Non-residential structures spending (-1.7%) was pulled lower by a drop in engineering structures spending. Although machinery and equipment spending (-13.5%) was generally down, payback from earlier outsized gains in volatile fleet-type spending (cars, planes, buses, etc.) was part of the story. Intellectual property product spending (-3%) fell, largely on a decline in the volatile software spending category. Notably, residential investment disappointed expectations, up just 1.1% in the fourth quarter as a drop in renovation activity offset gains in other categories such as ownership transfer costs (i.e. resale activity, up 15% in Q4).
- It wasn’t all bad news. Household consumption spending surprised to the upside, expanding 2.0%. Strong service spending (+2.3%) was the main driver, but better than expected durables spending (+0.8%) also helped. On a trend basis, consumer spending volumes moved more or less in line with population growth throughout 2019, a far cry from the trend of population growth plus about 1.5% that has been typical of the post-crisis period.
- Despite the solid household spending outcome, final domestic demand expanded a paltry 0.7%, consistent with hot and cold pattern that emerged around mid-2018.
- From an income point of view, compensation of employees rose a solid 5.0% annualized, enough to send the household saving rate a bit higher, to 3.0% (from a downwardly revised 2.8%). Corporate income, as captured by the gross operating surplus, bounced back somewhat from the prior quarter’s weakness, up 4.3%.
- We also received the monthly GDP report for December, which showed a solid 0.3% expansion. Breadth was decent, with 15 of 20 major industries reporting expanded output. Transportation and warehousing stood out, gaining 1.5% to offset earlier strike and pipeline related disruptions. Manufacturing also shook off three monthly declines, rising 0.4% on strength in non-durable production categories.
Key Implications
- Seesaw, back and forth again. It’s hard to like much of what we’ve seen today as the Canadian economy’s uneven performance of late continued into the close of last year, most clearly evidenced by domestic demand that has bounced around a slow trend for the last six quarters or so. The culprit this time wasn’t household spending, which was in fact a pleasant surprise this quarter, but rather another contraction in business investment, which has alternated between gains and contractions for four straight quarters. Abstracting from the noisier categories isn’t much help – industrial machinery and equipment spending, for instance, has declined for three straight quarters now, and has contracted six times over the last two years of data.
- In ‘normal’ times, the relatively strong monthly number for December would provide some solace that a better quarter may lie ahead. But, between the coronavirus, rail disruptions, and other factors, it seems that starting 2020 with another quarter of economic ‘grind’ is probably the best we can hope for right now.
- The key questions facing the Bank of Canada ahead of next week’s rate decision are likely the same ones facing all analysts right now: how long will the coronavirus disruption last, and how deep will that disruption be? It is too early to expect the Bank to have these answers, so a rate cut on Wednesday seems unlikely (though not impossible). Instead, given the list of risks facing the Canadian economy, expect Governor Poloz to open the door even wider to monetary easing this Spring.
