Q4: Canadian Economy Expanded 0.6%
The National Bank of Canada | Mar 03, 2013 06:15AM ET
The GDP grew 0.6% annualized in Q4, leaving Canada's GDP growth rate for 2012 at just 1.8%, the worst since the 2009 recession and underperforming the US (2.2%) for the first time in six years. In Q4, the economy was restrained by a massive drag from inventories which chopped 2.6% off growth. Domestic demand did better than expected with surprising contributions from government, business investment and even residential construction. Consumption also did better than what the monthly retail reports had hinted at. That said, consumption was supported in Q4 by a drop in the savings rate which fell four-ticks to 3.8%. The need to tap savings was partly due to a moderation in real disposable incomes (only a 0.7% annualized increase after Q3's 1.4% advance). Trade was a surprising contributor to growth as exports did better than expected. The monthly GDP data showed a 0.22% (unannualized) contraction in December output, the worst performance since May 2011. Manufacturing, utilities, wholesaling and retailing were among the sectors that saw declines. The weak handoff from December puts Q1 growth on the back foot already.
OPINION: The Q4 GDP report was better than expected given the healthy domestic demand. But that doesn't change the fact that Canada has now seen the worst two-quarter stretch since the 2009 recession. Are things going to improve in early 2013? While the drag from inventories is positive for the future as stock rebuilding adds to growth, it's unclear if that will be in Q1. Moreover, the areas of strength in Q4 are unlikely to remain so this year. Residential construction is contracting in line with softening demand and prices. The outlook for non-residential private sector investment isn't great either, if the recent survey on 2013 investment intentions is any guide. As for government's contribution to GDP, we're not expecting much given the ongoing fiscal tightening particularly at the provincial level. That leaves consumption spending to support domestic demand. But don't expect miracles from Canadians as they grapple with a softening labour market, higher taxes, and larger health care contributions (all hitting disposable incomes) to top the record debt load and negative housing wealth effects. All said, expect domestic demand to soften this year. Trade won't pick up the slack unfortunately, unless of course the global economy gears up sharply. That's not something we're anticipating at this point with a US economy being restrained this year by the sequesterand European and Japanese woes set to persist for a while. We're comfortable with our below-consensus call for 2013 Canadian GDP growth of just 1.5%.
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