Canada: Moderate GDP growth in Q4 confirms loss of momentum as consumers react to higher borrowing costs
March 2, 2018
Canada’s economy wrapped up last year on an unremarkable note, with seasonally-adjusted annualized (SAAR) economic growth coming in at 1.7% in the fourth quarter. This was up from the downwardly revised 1.5% expansion in the third quarter (previously reported: +1.7% SAAR) but below analysts’ expectations of a 2.0% gain. Moreover, the fourth quarter’s moderate growth was due largely to the further slowdown of consumer spending as indebted households began feeling the pinch of higher interest rates. Tepid by most measures, last year’s lukewarm second half stood in stark contrast to the first half of the year, when the Canadian economy grew at the fastest pace among G7 economies.
Domestic demand was stable from the third quarter according to data released by Statistics Canada, growing 3.9%. A breakdown by expenditure showed, however, that growth in household spending eased to 2.1% (Q3: +3.7% SAAR) as consumers felt increasingly squeezed by the Bank of Canada’s monetary tightening and chose to save more. Notably, temporary factors in the housing market propped up residential investment in the quarter, which lifted growth in fixed investment to 9.6% (Q3: +4.5% SAAR). Much of the increase resulted from new home construction ahead of the implementation of tighter mortgage-lending rules on 1 January. Furthermore, a more optimistic outlook prompted firms to markedly increase investment in machinery and equipment. Accumulated inventories, on the other hand, reduced headline growth by 0.7 percentage points. For its part, growth in government spending slowed to 2.8% (Q3: +3.6% SAAR).
In the external sector, exports recovered on the heels of a contraction in the third quarter, led by stronger shipments of chemical and forestry products. Growth in exports of goods and services grew 3.0% (Q3: -10.4% SAAR), which, given the jump in growth of imports of goods and services to 6.3% (Q3: +0.3% SAAR), was not enough to keep the external sector from dragging on headline growth. As a result, the external sector subtracted 1.1 percentage points from headline growth in the fourth quarter (Q3: minus 3.4 percentage points).
Full-year economic growth in 2017 came in at 3.0%, more than doubling the 1.4% expansion recorded in 2016 and coming in at a six-year high on last year’s buoyant consumer spending.
Author: Christopher Thomas, Economist