MNI: Canada Economy Beats Q4 Forecasts And Grows Again in Jan

Canada's economy continued to tread a middle ground with growth beating the central bank's estimate in the fourth quarter and further expansion in January, and while the pace remains below potential it underlines why the central bank may find it difficult next week to signal they will soon move to cut interest rates. 

Statistics Canada said Thursday that GDP climbed at a 1.0% annualized pace in the fourth quarter, above the Bank of Canada's estimate that output had stalled and the market consensus for 0.8% expansion. The agency's flash estimate for January showed a 0.4% expansion led by a rebound following the end of a major Quebec public sector strike that stalled GDP in December. 

Fourth-quarter growth was led by improving foreign trade with exports up at a 5.6% annualized pace led by crude oil, while imports declined 1.7%. Domestic activity dragged on GDP with final demand down 0.7% as a doubling of housing spending growth to 1% was offset by a 5.3% drop in business investment and weaker accumulation of inventories. 

Third quarter GDP was also improved as StatsCan cut the estimated contraction in half to -0.5%, another sign the economy is pulling away from the recession many economists had predicted over the last year. 

The report meshes with the Bank of Canada’s view that its 10 rate hikes are working to re-balance what was an overheated economy, and investors see Governor Tiff Macklem holding the 5% policy rate for a fifth time at the March 6 meeting. Growth for all of last year was the slowest since 2016 outside of the pandemic and population growth meant that per-person household spending over the fourth quarter fell for a third straight period. 

Bank officials have only recently pulled back warnings they could hike rates again and said active talks of cuts aren't appropriate until it's clear inflation will stabilize on target. The economy's resilience has come alongside evidence price pressures are lingering even with growth below potential that's estimated around  2%. While StatsCan said housing investment has receded to 7.7% of GDP in 2023 from a peak of 10% in 2021, there are clear signs of pent-up demand that could fuel more rabid price gains if Macklem signals he will cut rates soon. Wage gains moderated in the GDP report with employee compensation showing a 0.8% quarter-over-quarter gain that's the smallest since Q2 2020 but that's still an annualized pace at odds with tumbling productivity and 2% CPI inflation. 

Other inflation risks are outside the Bank's control. Government budget season has also started off in British Columbia with the kind of spending increases Macklem has said will make his inflation fight harder. Global inflation could also spark again if conflicts in Ukraine and the Middle East drive up commodity prices. The Bank still cautions about sticky inflation and predicts the path back to 2% will take until sometime in 2025. Those warnings were also premised on the Bank's December estimate that growth would stall or be modest through the early part of this year. That included growth forecast at a 0.5% annualized pace in the first quarter, which may again fall short if the January flash estimate holds up.