Canada: Canadian economy loses momentum in Q4
March 2, 2017
Canada’s economy lost steam in the fourth quarter of last year as the country continues to struggle with subdued oil prices. In Q4, the economy grew at a seasonally adjusted annualized rate (SAAR) of 2.6%, which beat market expectations of a softer 2.0% expansion but was nonetheless below Q3’s 3.8% expansion. Despite Q4’s lower print, overall GDP growth for 2016 totaled 1.4%, which was a significant improvement over 2015’s 0.9% expansion.
Q4’s deceleration was driven by a poor performance in domestic demand on the back of waning fixed investment, which recorded the largest contraction in a year, dropping 6.0% (Q3: -0.8% SAAR). The result was due to declining investment in industrial machinery and non-residential structures, which reflected the ongoing weakness in the oil sector. Conversely, private consumption expanded at a healthy pace and was the single biggest domestic growth driver (Q4: +2.6% SAAR; Q3: +2.7% SAAR), supported by higher spending on financial services and durable goods.
On the external side, imports swung from a 4.8% increase in Q3 to a massive 13.5% drop in Q4. Meanwhile, exports continued to grow, albeit at a more moderate pace (Q4: +1.3% SAAR; Q3: +9.4% SAAR). Consequently, the external sector’s net contribution to growth was plus 4.8 percentage points, marking the largest contribution in over five years.
Despite beating market expectations, Q4’s growth figure is slightly misleading as it was distorted by the massive drop in imports. Domestic demand numbers show that in reality, the Canadian economy remains fragile, beset by weak fixed investment. However, strong government spending coupled with a recovery in oil prices should cause growth to accelerate in 2017.
Author: Luis Lopez Vivas, Economist