Canada's economy grows more than expected, dodging recession

Stronger growth supports case for Bank of Canada to hold interest rates steady until June

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The Canadian economy has dodged a recession as gross domestic product edged up in the fourth quarter last year, primarily due to higher exports of crude oil and reduced imports, making it likely the Bank of Canada will stick to its plan of holding interest rates when it makes its next announcement on March 6.

Real GDP rose by an annualized one per cent for the three months ending Dec. 31, compared to the consensus of 0.8 per cent, following a 0.5 per cent decline in the third quarter, according to Statistics Canada. The agency had originally said GDP declined by an annualized 1.2 per cent in the third quarter.

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GDP rose for the third consecutive year since 2020, when the COVID-19 pandemic led to a contraction, but at its slowest pace since 2016, not counting 2020. Advance information indicates real GDP rose 0.4 per cent in January, Statistics Canada said.

Not everything was relatively rosy. Final domestic demand, which is composed of expenditures on final consumption and gross fixed-capital formation, dropped 0.2 per cent in the fourth quarter, after a 0.2 per cent increase in the previous quarter.

“Growth appears to have been driven largely by an easing of previous supply constraints helping exports and car sales, rather than necessarily an improvement in domestic demand,” Andrew Grantham, an economist at CIBC Capital Markets, said.

He continues to predict the Bank of Canada’s first interest rate cut will take place in June.

TD Economics senior economist James Orlando said the economy “showed some life” in the final quarter with consumers, who had pared back on spending for much of the year, deciding to be busy “driving around in their new cars and filling shopping malls during the holiday season.”

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He said a return to growth in the fourth quarter after two quarters of “effectively no growth” was expected, but the economic narrative hasn’t changed: High interest rates are weighing on economic growth and GDP per capita has declined in five of the last six quarters.

“We think the wheels are in motion for this to come through the data in the coming months and have penciled in the first rate cut for June,” he said.

The increase in GDP was “too small” to prevent a sixth consecutive decline in the output on a per capita basis as population growth continues to surge higher, Royal Bank of Canada economist Nathan Janzen said.

Exports of goods and services rose 1.4 per cent in the fourth quarter after a 0.3 per cent drop in the third quarter. This was driven by a 6.2 per cent rise in crude oil and crude bitumen exports. Imports, however, declined by 0.4 per cent during the same period, after rising 0.3 per cent in the third quarter last year, due to lower imports of vehicles and their parts.

Household spending also increased 0.2 per cent in the fourth quarter after a 0.1 per cent drop in the previous quarter. However, investment in housing was down 0.4 per cent in the quarter, making the sixth decline in the past seven quarters, Statistics Canada said. Despite more activity in new construction and renovations, the resale market weakened, the agency said.

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Business investment declined for the sixth time over the past seven quarters, with investment in non-residential structures falling by three per cent. In addition, employee compensation rose 0.8 per cent for the quarter, which the agency said was the slowest growth rate since the second quarter of 2020.

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“The lower growth in the fourth quarter of 2023 reflected slower wage growth in services producing industries relative to the previous quarter, as well as declining wages in the goods-producing industries,” Statistics Canada said.

Corporate incomes fell but continued to grow, as they increased 2.9 per cent in the fourth quarter, after rising 3.4 per cent in the third quarter.

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