Take GDP surprise with 'grain of salt': What latest numbers mean to the Bank of Canada

On a per capita basis, growth still contracting, economist says

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Canada’s gross domestic product grew by a stronger-than-expected 0.2 per cent in November and Statistics Canada issued a flash estimate for December growth of 0.3 per cent on Wednesday, suggesting the Canadian economy ended the year on a stronger footing than many expected. Economists are now projecting the economy reversed course to expand by 1.2 per cent on an annualized basis in the fourth quarter after contracting in the third. Here’s what economists think the strong numbers mean for the economy and the Bank of Canada.

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Claire Fan, Royal Bank of Canada

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The GDP’s upside surprise should be taken with a “grain of salt,” said Claire Fan, an economist with Royal Bank of Canada.

“The early GDP growth estimates however have been highly revision prone and other data has been softer,” Fan said, referring to Statistics Canada’s flash estimate for declining manufacturing sales for December, and falling hours worked, down in the fourth quarter for the first time since the second quarter of 2020.

Fan argued the numbers are not as strong as they might appear given they were likely influenced by one-off gains, such as maintenance-related factory shutdowns and labour strikes.

Even if Statistics Canada’s numbers hold for November and December, something Fan is dubious of, she pointed out that a 1.2 per cent annualized gain in the fourth quarter would still translate into a contraction on a per capita basis — and would be the sixth consecutive such quarterly drop.

“Overall we continue to expect pressures from elevated interest rates to curb consumer demand, stalling growth in both output and inflation over the first half of 2024 before the BoC is expected to cut rates in June,” Fan said.

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Douglas Porter, Bank of Montreal

Canada’s economy has a lot more “momentum” going into the new year than many expected, likely shredding estimates from BMO and the Bank of Canada for flat GDP in the fourth quarter, said Douglas Porter, chief economist at BMO Capital Markets.

“Assuming December’s flash is close to accurate, there’s simply much more momentum than widely expected heading into 2024,” Porter said in a Jan. 31 note to investors, adding he believes the Canadian economy received a lift from strong growth in the United States.

Data from last week showed the U.S. economy expanded 3.3 per cent, far outpacing estimates of two per cent.

“It seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada,” Porter said, noting that November’s gains were largely attributable to sectors that benefit from exports, such as manufacturing and resources.

As for the Bank of Canada, Porter thinks these numbers take some of the pressure off the central bank to cut rates 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,” he said.

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Capital Economics

The risk that the Canadian economy will contract in the first quarter of 2024 is a little lower thanks to the strong December GDP estimate, economists from Capital Economics said in a note Wednesday.

While business surveys are still showing weakness and GDP growth is sluggish, the strong handover from December suggests the economy is growing again, and could get another boost from the Trans Mountain pipeline expansion, slated to start operating in the second quarter.

“In short, it may soon be safe to say that the economy has dodged recession, although spare capacity is nonetheless opening up and should help to ease inflationary pressures.”

Bryan Yu, Central 1

“November’s GDP points to an economy with some life in the fourth quarter and positive momentum heading into 2024 without any significant weakness percolating through the latest numbers,” said Bryan Yu, chief economist at Central 1.

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As proof, Yu pointed to production the grew in 13 of 20 sectors tracked by Statistics Canada, though he acknowledged some of the expansion was attributable to rebounds from shock events in the months prior.

Given the stronger end to the year, there’s a chance that higher spending could boost inflation, which accelerated in December, pushing rate cuts out to mid-2024.

“Central 1 currently forecasts an April cut. This will depend upon the path of the labour market slack and wages, and inflation,” Yu said.

Andrew Grantham, CIBC Capital Markets

The Canadian economy closed out the year more “emphatically” than expected, said Andrew Grantham, an economist with CIBC Capital Markets. Still, he had a few bones to pick with the GDP data including that the numbers are highly susceptible to being revised, while much of the growth came from sectors that previously experienced supply bottlenecks.

As a guide for the Bank of Canada’s path to rate cuts, Grantham, however, believes the bank will put more stock in the next set of jobs and inflation numbers.

“Upcoming employment and CPI releases should be more important in determining when the Bank of Canada may start to cut interest rates, and we retain our June call for the first move,” he said.

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