The Canadian economy bounced back sharply in the final quarter of 2023, driven by higher goods production and shipments and stronger U.S. demand. 

Preliminary estimates say gross domestic product grew 0.3 per cent in December, Statistics Canada reported Wednesday in Ottawa. That followed a 0.2 per cent expansion in the previous month, exceeding forecasts for 0.1 per cent in a Bloomberg survey of economists.

Overall, the industry-based numbers point to growth of 1.2 per cent on an annualized basis in the final three months last year, reversing a third-quarter contraction. The figures suggest Canada’s economy was being pulled along by robust consumer spending in the U.S. to close out 2023, and was expanding at a faster rate than the Bank of Canada’s projections. The central bank’s forecast was for flat fourth-quarter growth. 

Although the data will likely be revised on Feb. 29 when the income and expenditure-based figures for the fourth quarter are published, they show an economy that has managed to avoid a prolonged contraction so far. 

The release of the data temporarily caused bond yields to rise, though they quickly resumed their downward trend, with the two-year Canada benchmark trading around 3.96 per cent as of 10:03 a.m. in Ottawa. The loonie strengthened.

The show of economic strength may buy the Bank of Canada some time to put off interest rate cuts until it’s confident about the downward momentum in inflation. But the growth is also partly due to population increases. On a per-capita basis, the Canadian economy has been shrinking. 

“With the solid end to 2023, this clearly points to upside risk for our 2024 call of just 0.5 per cent GDP growth,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors. “Given the recent large upward revisions to US growth, it’s far from shocking that Canada’s pace could also get a lift, with 1 per cent growth entirely within reach this year. Of course, as we so often like to point out, that’s still very modest when stacked up against rollicking population growth.” 

Last week, the central bank held its policy rate at five per cent for a fourth straight meeting. Governor Tiff Macklem said discussion of monetary policy is now shifting to how long it needs to stay at the current level — policymakers don’t expect to increase borrowing costs again if the economy evolves in line with their forecasts. 

The central bank sees growth accelerating around mid-2024, with household spending picking up while exports and business investments get a boost from foreign demand. It’s forecasting 0.8 per cent GDP growth this year and 2.4 per cent in 2025.

“I think this will give the Bank of Canada pause, but I don’t think it dramatically impacts their pace,” Dennis Mitchell, chief executive officer of Starlight Capital, said on BNN Bloomberg Television. “We have waves of mortgage refinancing that are going to put significant downward pressure on consumer spending and household disposable income.”

Wednesday’s figures suggest that when the final numbers come in, they’ll show the Canadian economy grew 1.5 per cent last year.

Film industry restarts

In November, the majority of the growth came from the goods-producing industries, which saw 0.6 per cent gains, the highest growth rate since January 2023. Service industries edged up 0.1 per cent.

The manufacturing sector jumped 0.9 per cent, wholesale trade rose 0.7 per cent and mining, quarrying and oil and gas extraction grew 0.3 per cent.

While transportation and warehousing expanded 0.8 per cent in November, the sector was one of the main drags to December output, along with construction and educational services, according to Statistics Canada’s advance estimate.

The education sector also declined 0.3 per cent in November due to strikes by workers in Quebec. 

Information and cultural services increased 0.5 per cent, led by the publishing and motion picture industries. The latter saw the largest monthly increase since September 2022, benefiting from the end of the Hollywood actors’ strike. The labour dispute was resolved in early November, allowing film and television companies to ramp up productions again.

This is the first key economic data release since the Bank of Canada’s first rate decision of the year. Policymakers next set rates on March 6, after releases of January jobs and inflation data, as well as another GDP print. Economists widely expect the bank to hold rates steady again.