Highlights:
- Canadian January GDP jumped 0.6% in the month which was double the 0.3% expected going into the report. This represented the third consecutive month of stronger-than-expected monthly gains with GDP rising 0.3% in December and 0.5% in November.
- Goods-producing industries jumped 1.1% with manufacturing output soaring 1.9% and mining up a similar 1.9%. Rising energy and non-energy commodity prices were a factor in the strength in both sectors. These increases were tempered by mild winter temperatures sending utilities down 1.3%.
- Growth in service-producing industries rose a stronger-than-expected 0.4%, led by wholesale trade jumping 2.4% with the retail trade sector up 1.5%.
Our Take:
The increase in January GDP represents the third consecutive month of robust gains. It contributed to the year-over-year rate jumping to 3.1% in January relative to 2.0% in Q4 and an average of 1.1% over the first three quarters of 2016. The upward trend in this rate in part reflects oil and gas sector activity starting to contribute to growth though it also reflects an improving trend non-oil and gas commodities and continued steady gains in non-commodity-related sectors. This broadening in economic strength is expected to contribute to GDP growth continuing at an above-average pace soaring to likely 4.0% in the first quarter following stronger-than-expected gain of 2.6% in the fourth quarter. The expected increase in Q1 would be well above the 2.5% projected by the Bank of Canada in its January forecast with Q4 growth also well above the Bank’s 1.5% forecast. Thus domestic conditions are seemingly pointing to the reduced need for stimulus. However, recent comments by Governor Poloz are not indicative of policy poised to change with some doubt expressed as to the sustainability of the recent stronger-than-expected data. As well, uncertainty about the potential increase in trade protectionism by the Trump Administration presents a downside risk to growth going forward and reason to keep policy very accommodative. Our forecast does assume an eventual hike in the overnight rate from the current 0.50% though not until the second quarter of 2018 with uncertainty about external trade weighing on growth through the remainder of this year.
