Canada: GDP growth slows in Q4, but beats markets expectations and brings full year 2015 growth to 1.2%
March 2, 2016
The Canadian economy saw falling investment in the first three quarters of 2015 and Q4 was no exception. The collapse of energy prices in 2014 brought about a deterioration in resource-related investment that had dragged Canada into a recession in the first half of 2015, and dragged on growth in Q4. Despite the decline in investment, domestic demand and weaker imports helped the economy expand at a seasonally adjusted annualized rate (SAAR) of 0.8% in Q4. This was a notable deterioration from the revised 2.4% increase recorded in Q3 (previously reported: +2.3% SAAR), which brought full year 2015 growth to 1.2%—less than half of the 2.5% expansion recorded in 2014. Although Q4’s growth was modest, there is still reason for optimism. The result overshot market analysts’ expectations of flat growth as they had seen that the soft patch in the U.S. economy that occurredduring the winter would have more of a negative impact on growth.
Canada owes its surprise performance to its deteriorating currency, which dragged on imports in the last quarter of 2015. Imports fell 8.9% in Q4, which was down from a 2.4% contraction in Q3 and marked the largest fall since Q1 2009. The Canadian dollar has lost ground against a basket of currencies, thereby increasing the relative price of imports. This is particularly apparent in the decline of imported consumer goods in Q4. The effect of the weaker dollar was likely complimented by the fall in fixed investment, which generally involves a substantial amount of imported capital products. Exports also declined in Q4, which subtracted from growth, although the net contribution of the external sector was still positive. Exports dropped 2.2% in Q4, contrasting the striking 10.8% increase observed in Q3. The net result was a contribution of 2.2 percentage points to growth from the external sector, just under half of the 4.2 percentage point contribution in Q3. The fall in imports was likely tied to disappointing growth during the winter in the U.S., the most significant market for Canadian exporters. Higher-frequency data suggest that good news may be on the way. Monthly trade figures show that exports gained strength toward the end of 2015 and in January 2016, with motor vehicle parts and trade with the U.S. driving the increase. This pick up in momentum, coupled with a still-weak Canadian dollar, should bode well for external sector growth in Q1 2016.
Domestic demand was held back by investment spending. Business investment recorded the fourth consecutive decline in Q4, a statistic that is illustrative of the depressed situation in the natural resources sector. Business investment is the main conduit through which the decline in energy and other commodities prices affects the economy and is exemplified by the four consecutive double-digit decreases in non-residential fixed investment. Investment in residential structures was the only category of fixed business investment that managed to register an expansion, however modest. The decline in fixed investment accelerated in Q4, falling 6.3% (Q3: -4.6% SAAR). Domestic demand fell 0.6% (Q3: +0.1% SAAR), dragged down by falling imports, and weak total consumption growth (Q4: +1.1% SAAR, Q3: +1.6% SAAR). Government consumption expanded 1.5% (Q3: +0.1% SAAR) while consumer spending moderated from a 2.2% expansion in Q3 to a 1.0% increase in Q4.
Canada’s economy is adjusting to new realities in the energy and commodity markets, as well as from a slowdown in China, and thus is seeking out new sources of growth in the non-resource sector. This adjustment resulted in a turbulent 2015, however, things may be picking up. The stimulus spending plan that the administration led by recently-elected Prime Minister Justin Trudeau has put forward should bolster growth via government investment and consumption. The U.S. economy is also showing signs of steady growth, which also should boost prospects for the Canadian economy.
Author: Robert Hill, Economist