Canadian economy grows in Q4 2016, beating expectations

Consumer spending increased in 2016's final quarter, contributing to growth in Canadian GDP | Shutterstock

Real GDP in Canada increased 2.6% at an annualized rate in 2016’s final quarter, Statistics Canada announced March 2, exceeding analysts’ call for growth of around 2.0%.

The increase was supported by solid growth in consumer spending, which was up 2.6% in the quarter, housing (up 4.8%) and government outlays (2.6%). On the negative side, business capital spending dropped 8.2%), and imports (up 13.5%) far exceeded exports (up 1.3%).

“Just one day after the Bank of Canada delivered a relatively sombre view on the Canadian economy, the evidence continues to mount that the growth landscape is shifting for the better,” BMO chief economist Douglas Porter said in a note to investors.

Porter called the GDP report “surprisingly upbeat” and said that although the release didn’t provide a boost to the Canadian dollar—which actually weakened relative to the U.S. dollar—Canada’s central bank will eventually have to acknowledge the economy’s positive trajectory.

“We believe that the Bank’s messaging will slowly shift as well through 2017, especially if our revised call of 2.3% growth proves correct, and thus their estimate of the output gap will close much more quickly,” he said.

CIBC Economics’ Nick Exarhos agreed the GDP numbers for the quarter were solid but pointed out the Bank has some valid reasons for its trepidation.

“The details of today’s release—particularly regarding trade—were messy, and a few soft spots tied to domestic demand will give reason for the Bank of Canada to remain cautious,” he said. “Although we continue to have concerns with regards to business capital spending, which was once again weak in Q4, a drawdown in manufacturing inventories bodes well for production in the first quarter.

“Furthermore, solid compensation numbers bode well for consumer spending in 2017, where we’re likely to upgrade our forecast. Overall, although he Bank continues to highlight its dovish stance, the evidence continues to point to an output gap that’s steadily narrowing.”

In December alone, GDP increased 0.3%. Strength was seen in utilities (up 3.3%), construction (up 1%) and real estate (up 0.3%). Retail and oil and gas saw declines, falling 0.1% and 3.7%, respectively.

The Canadian dollar was trading at approximately 74.7 cents U.S. as of press time – down more than two-tenths of a cent.