Canada: GDP growth slows in Q4 2018
Economic momentum notably eased in the fourth quarter, with seasonally-adjusted annualized (SAAR) growth markedly decelerating to 0.4% over the previous quarter (Q3: +2.0% SAAR). The print was the softest pace of growth since Q2 2016 and missed analysts’ expectations of 1.2% for Q4. In annual terms, economic growth weakened to 1.6% in the fourth quarter (Q3: +1.9% year-on-year). For the year as a whole, annual economic growth in 2018 came in at 1.8% (2017: +3.0%)
Domestic demand ebbed in the quarter, shrinking 1.5% (Q3: -0.5% SAAR), due to a sharper contraction in gross fixed capital formation and a slowdown in final consumption expenditure. Fixed investment deteriorated in Q4, shrinking 10.4% in SAAR terms over the previous quarter compared to a 6.7% decrease in Q3. Although the drop in investment was broad-based, the decline in residential investment was particularly noteworthy, contracting at the steepest rate since the 2008-2009 Great Recession. Tighter mortgage guidelines have cooled the real estate market and declining year-on-year Q4 house prices likely led the fall in residential investment. Meanwhile, private consumption growth slowed to 1.1% in the fourth quarter from 1.4% in Q3 SAAR, marking the weakest rate in over five years. A fall in durable spending, likely the impact of higher interest rates following a rate hike at the start of Q4, seemed to weigh on the Q4 reading. On the upside, government spending accelerated to 2.0% in Q4 (Q3: +1.6% SAAR), while a strong build-up in inventories contributed positively to the headline GDP growth figure.
The external sector also weighed on growth in the quarter, with exports of goods and services contracting 0.2% SAAR from Q3’s 3.3%, likely driven by temporary production problems in the energy sector. Meanwhile, imports decreased 1.1% SAAR (Q3: -8.6% SAAR) on weaker demand for industrial chemicals, plastic and rubber products, and motor vehicles and parts. As a result, the net contribution of the external sector was plus 0.3 percentage points in Q4, down from the third quarter’s plus 3.9 percentage-point contribution.
Reflecting on the implications of Q4’s print on the economy, Brian DePratto, senior economist at TD Economics, was downbeat:
“Canada is in the midst of a growth slump. Weaker-than-expected near-term economic momentum has emerged, at the same
time that energy sector production curtailments are sending growth temporarily lower. Today’s weak GDP report (0.4% q/q
saar) is likely to be followed with another near-zero out-turn in 2019Q1. Such a modest forecast means that it would not
take too much of a miss versus expectations to send first quarter growth into negative territory. This has led clients to question
the possibility of Canada entering a recession independent of a downturn in the United States.”
Looking ahead, economic growth should decelerate somewhat on the back of higher interest rates, potential oil production curtailments and global economic uncertainty. Nevertheless, the Bank’s projected slowdown going forward and Q4’s sluggish growth reading suggests rates will likely be stable for much of this year, boding well for economic growth. Moreover, the ratification of the USMCA should support business investment and confidence, while the removal of U.S. tariffs on Canadian steel and aluminum should boost the external sector.