Canadian gross domestic product will be in focus after firmer labour market reports in December and January, and an upside headline inflation surprise increased the odds that the Bank of Canada will forego another rate cut in March.
Our expectation is for real GDP to rise 1.5% on an annualized quarter-over-quarter basis in Q4. Household spending has been showing signs of life in the wake of earlier interest rate cuts. We expect consumer spending rose 3% in Q4 on the largest retail sale volumes increase since Q3 2021. And, residential investment likely posted a second consecutive quarterly increase driven by higher building activity and surge in home resales. But, business spending has remained significantly softer—imports of machinery and equipment fell again in Q4, and an uncertain global trade backdrop will continue to weigh on business investment plans in 2025. Labour markets have firmed in recent months, but actual hours worked declined by 0.2% in Q4—the first quarterly drop in a year.
Growth momentum on a monthly basis appears to have faded later in the quarter. For December, we expect GDP edged up 0.1%, below Statistics Canada’s flash estimate a month ago of 0.2% growth and only partially retracing a 0.2% decline in November. Retail sales was robust in the December holiday shopping period—Canada’s tax holiday likely boosted a significant amount of goods consumption. But, accommodation and food services spending pulled back and December manufacturing sales came in substantially softer than preliminary estimates with details pointing to a contraction in output in the sector. Work stoppages in the transportation sector at ports and Canada Post in November and December will continue to distort the data, but Statistics Canada’s preliminary GDP estimate pointed on net to another decline in transportation and warehousing.
We expect the signs of life in the household sector and upside inflation surprises in recent months will be enough for the BoC to stand pat on interest rates in March for the first time since June 2024. The potential for significant tariff hikes remain a downside risk to economic growth and the interest rate outlook, but absent a trade shock, economic data is suggesting Canada’s economy may be faring better than initially feared.
Week ahead data watch
Next Thursday, job openings from SEPH will be watched closely for signs that labour market conditions are beginning to stabilize – job openings were still running 23% below year-ago levels at last count in November but postings reported separately from indeed.com rose in December.
U.S. Personal spending likely dipped by 0.1% in January, in line with the contractions in retail sales during that month. Personal spending is expected to grow by 0.6% in January, supported by higher transfer payments.
StatsCan will release the annual CAPEX intentions survey next Wednesday. The survey is an important annual gauge of business investment intentions but will likely not capture fully the impact that increased international trade uncertainty may be having on investment plans. The survey is typically conducted over the fall and early winter (September to January), which is before the period of significant tariff risks escalated.
