The Canadian economy grew by 0.99% quarter/quarter annualized (q/q) in 2023 Q4, while Q3 was revised higher (-0.5% q/q from -1.1%). Furthermore, the flash estimate for January showed a +0.4% monthly increase. Stripping out external factors, final domestic demand came in at a very weak -0.7% q/q.
International trade supported growth, with exports of goods and services rising 5.6% q/q. This was driven by “crude oil and crude bitumen exports (+6.2%), which coincided with sustained production of crude oil in Alberta, as well as that of travel services and other transportation equipment and parts.” Imports were down (-1.7% q/q), driven by “intermediate metal products, tires, motor vehicle engines and parts, and passenger cars and light trucks.”
Consumer spending rose by +1.0% q/q. The growth was largely seen in durable goods (+7.0% q/q), such as “new trucks, vans and utility vehicles”. Easing supply chain snarls and rapid population growth were cited as drivers. Growth in services was more tepid at 0.4% q/q.
Business investment was a big drag on the quarter, with non-residential structures and machinery/equipment down 9.5% q/q. This was led by “lower spending on aircraft and other transportation equipment.” Residential investment also fell on the quarter (-1.7% q/q), which “despite increased activity in new construction (+2.2%) and renovations (+0.2%), the resale market weakened across Canada, which offset increased housing investment, as ownership transfer costs fell 7.7% in the fourth quarter.”
Key Implications
The Canadian economy showed some life in the final quarter of 2024. Consumers, who have been paring back spending for much of the year, were busy driving around in their new cars and filling shopping malls during the holiday season. We also saw strong demand for exports, as the benefits of a surging U.S. economy spilled over into Canada. At the same time, business investment and government spending were a drag on growth, with the latter reflecting some mean reversion following the big spending outlays to fight wildfires over the summer.
A return to growth in the fourth quarter was widely expected, following two quarters of effectively no growth in the country. While today’s report came in better than consensus (+0.8% q/q) and much better than what the BoC was thinking (0% q/q), the narrative on the Canadian economy remains the same: High interest rates are weighing on economic growth. Stripping out international drivers, the economy contracted, while GDP per capita has now declined in five of the last six quarters. The BoC has recognized this weakness in recent commentaries, but it is patiently waiting for inflation to follow suit. We think the wheels are in motion for this to come through the data in the coming months and have penciled in the first BoC rate cut for June.
