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Mar 2, 2018

Canadian GDP growth falls short of expectations in Q4

Canadian GDP growth falls short of expectations in Q4

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Canada’s economy decelerated more than expected in the second half of last year, amid signs indebted households have begun slowing down spending.

The economy grew at an annualized pace of 1.7 per cent in the fourth quarter, Statistics Canada reported Friday, versus economist expectations for 2 per cent growth. Third-quarter gross domestic product growth was also revised down to 1.5 per cent from an initial estimate of 1.7 per cent.

The data not only show the slowdown is well underway, which was expected, but an economy that isn’t even growing above its so- called potential growth level.

That’s a surprise since most economists were expecting Canadian growth would continue to run slightly above its noninflationary speed limit for at least another year, leading to price pressures that would prompt the Bank of Canada to keep hiking interest rates.

"The main message though is that the exciting growth from the middle of 2016 up until the middle of 2017 is now truly in the past, and the economy is back to the drudgery of slogging out something closer to potential of around 2 per cent. With trade uncertainties mounting and inflation still reasonably well behaved, this gives the Bank of Canada plenty of leeway to stay cautious," wrote Doug Porter, chief economist at BMO Financial Group in a note to clients. 

Randall Bartlett, chief economist at the Institute of Fiscal Studies and Democracy, told BNN current risks like possible U.S. tariffs on steel and aluminum and uncertainty around NAFTA are tilted to the downside for Canada's economy.

“Things are tilted to the downside. I think that the Bank of Canada is going to be pretty cautious in how it moves forward and how quickly it raises rates,” he told BNN in an interview Friday.  

What may be worse is that fourth-quarter GDP figures were exaggerated by temporary factors in housing. Spending on residential structures surged in the last three months of 2017 to an annualized 13.4 per cent, the strongest quarterly increase since 2012. The gain was led by stronger-than-expected new home construction, and as buyers rushed to get ahead of tighter mortgage qualification rules that came into effect Jan. 1.

The increase in residential spending was responsible for 1 percentage point of the 1.7 per cent growth rate, Statistics Canada said. Residential investment had been a drag on growth the previous two quarters.

Statistics Canada did revise up growth estimates for the first half of the year to 4.2 per cent, from an initially reported 4 per cent.

The second half slowdown was driven in large part by household spending, with consumption growth in the fourth quarter at the slowest pace since 2016.

Bank of Canada to remain cautious on rates, lower loonie to benefit Canada for now: Economist

BNN speaks with Randall Bartlett, chief economist at the Institute of Fiscal Studies and Democracy about the latest Canadian GDP numbers — the first significant piece of economic data since the release of Ottawa's latest budget.

Other highlights of the GDP report:

-Statistics Canada reported GDP for the month of December rose 0.1 per cent, in line with analyst expectations

-Monthly GDP was also driven higher by the housing market gains, which helped offset a drop in construction and manufacturing

-GDP expanded by 3.0 per cent last year, the fastest pace since 2011

-Exports recovered in the fourth quarter, with an annualized 3 per cent gain, after plunging in the third quarter. Still, that wasn’t enough to keep the trade sector from being a drag on growth with imports up 6.3 per cent

-The slowdown in household spending is due in part to a higher saving rate, which increased to 4.2 per cent in the fourth quarter, from 4 per cent in the third quarter

-Businesses continued to add inventories in the fourth quarter, but less than they did in the third quarter. The drop in inventory accumulation reduced growth by 0.7 percentage points

-Non-residential business investment accelerated in the fourth quarter, up 8.2 per cent on an annualized basis

--With assistance from Erik Hertzberg and with files from BNN