February 1, 2024
The Canadian economy picked up speed in late 2023 and appeared to shake off a period of stagnation, getting a boost from the end of various labour disputes and the likely spillover effects of a strong U.S. economy.
Real gross domestic product grew 0.2 per cent in November, outpacing a previous estimate of 0.1 per cent, Statistics Canada said Wednesday in a report. In a preliminary estimate, the agency said the economy accelerated to a 0.3-per-cent gain in December.
Taken together, those numbers suggest the Canadian economy grew at an annualized rate of 1.2 per cent in the fourth quarter, rebounding from a contraction in the summer quarter. Statscan will release more comprehensive data on fourth-quarter performance on Feb. 29, and these figures often vary widely from those published on a monthly basis.
The Canadian economy had stalled since around the middle of last year, weighed down by restrictive interest rates that weakened consumer spending and business investment. After accounting for a population surge, the country’s economic performance has been considerably weaker in per capita terms.
Based on a recent projection, the Bank of Canada expects near-zero growth to persist into early 2024, followed by an upturn as the year progresses.
But Wednesday’s GDP report points to a quicker return of growth, raising the odds of a soft landing, in which inflation is brought to heel without a significant downturn and job losses. The annual inflation rate has ebbed to 3.4 per cent – less than half of the peak in 2022 – and the Bank of Canada is widely expected to begin cutting interest rates by mid-2024.
In a note to clients, Bank of Montreal chief economist Doug Porter said there’s “less pressure on the BoC to start cutting any time soon. This solid result, after a long dry spell for growth, affords policymakers the ability to gently push back on easing chatter, as they wait for underlying inflation to come down further.”
The GDP report indicated that most of November’s growth came from goods-producing industries, which jumped by 0.6 per cent in the month. Output on the services side of the economy grew by 0.1 per cent, despite the impact of strikes in the public sector in Quebec.
Elsewhere, the resolution of various work stoppages led to a bounce back in production. The end of a strike by St. Lawrence Seaway employees contributed to a 0.8-per-cent expansion in the transportation and warehousing industry in November. The film and TV industry resumed many productions after the end of a strike by the Screen Actors Guild-American Federation of Television and Radio Artists.
Output in the manufacturing industry rose by 0.9 per cent in November, helped in part by petrochemical plants raising production after maintenance-related shutdowns. Resource-extraction industries grew 0.3 per cent, with the oil and gas industry expanding by 1.5 per cent.
“Since these sectors are heavily influenced by exports, it seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada,” Mr. Porter said.
The United States has been posting robust growth numbers of late, defying widespread predictions that it would succumb to higher interest rates and enter a recession. The U.S. economy grew at an annualized rate of 3.3 per cent in the fourth quarter, based on a preliminary estimate published last week by the Bureau of Economic Analysis, and by 4.9 per cent in the third quarter.
U.S. consumers are helping to drive that growth, with big spending on restaurants and hotels, among other areas. Americans are considered less rate-sensitive than Canadians, on account of 30-year mortgages that allowed homeowners to lock in low interest rates before the Federal Reserve began to tighten lending conditions.
In Canada, the household debt-service ratio has climbed to a record high, even before many people deal with the impact of mortgage renewals. Consumption is declining on a per capita basis, and the Bank of Canada expects that to continue in the near term.
At last week’s interest-rate decision, the central bank said it is pivoting toward a discussion of how long to keep rates at current levels. The bank’s policy rate was held at 5 per cent, the highest level since 2001.
Still, some core measures of inflation – which strip out volatile aspects of price growth – accelerated late last year, a potential complication for the bank as it tries to bring inflation back to its 2-per-cent target.
“A resilient economy paired with no durable evidence of a soft patch in underlying inflationary pressures make it highly premature to even be talking about rate cuts while hike risk has by no means gone away,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, said in a client note.
Former Bank of Canada deputy governor Paul Beaudry said earlier this week that he expects the central bank to start cutting rates in July, because of the persistence of underlying inflation. “A lot of the core measures haven’t been coming down,” he said in an interview with CIBC Capital Markets.
Mr. Holt of Scotiabank has argued the Canadian economy is stronger than it appears, citing temporary hits from labour disputes and inventory adjustments. “Canada’s economy keeps defying the naysayers who are trying their best to talk it into a bigger problem than is warranted,” he said on Wednesday.
