Canadian economy returns to growth, with heavy assist from U.S.

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The Canadian economy is nearing a soft landing as it resumed growth in the final months of 2023, allowing the country to skirt a recession in what was otherwise a sluggish year.

Real gross domestic product rose at an annualized pace of 1 per cent in the fourth quarter, Statistics Canada said on Thursday, outpacing analyst estimates of 0.8 per cent. The economy rebounded from a 0.5-per-cent slide in the July-to-September period, thus avoiding two consecutive quarters of decline – what some economists refer to as a technical recession.

It also appears that 2024 is getting off to a healthy start. In a preliminary estimate, Statscan said real GDP jumped 0.4 per cent in January, helped by the end of public-sector strikes in Quebec.

The economy has slowed markedly since the Bank of Canada implemented a rapid series of interest-rate hikes to curb demand and bring inflation under control. Outside of 2020, when COVID-19 slammed the economy, real GDP growth of 1.1 per cent in 2023 amounted to the slowest year of expansion since 2016.

Canada’s economic performance looks even weaker after accounting for the strongest population growth in decades, resulting in a decline in per-capita output.

But in aggregate, the economy is managing to eke out growth, boosting the odds that central bankers will pull off a rare soft landing – bringing inflation to heel without a significant rise in unemployment.

The annual inflation rate has ebbed to 2.9 per cent, taking it ever closer to the Bank of Canada’s 2-per-cent target, and analysts expect the central bank to start lowering interest rates around the middle of the year.

“The Canadian economy showed some life in the final quarter of 2024,” James Orlando, senior economist at Toronto-Dominion Bank, wrote in a client note. Even so, “the narrative on the Canadian economy remains the same: High interest rates are weighing on economic growth.”

Canada seems to be getting a big boost from a strong U.S. economy. Exports of goods and services rose at an annualized pace of 5.6 per cent in the fourth quarter. Statscan said the increase was driven by exports of crude oil and bitumen, among other products.

Consumer spending rose at a 1-per-cent-annualized rate, although Statscan noted that per-capita consumption fell for the third consecutive quarter. The increase in aggregate spending “was led by higher spending on new trucks, vans and utility vehicles as supply chain issues continued to ease and back orders were fulfilled,” the report said.

Elsewhere, there was ample weakness in Thursday’s report. Real business investment fell for the sixth time over the past seven quarters, and businesses also slowed their accumulation of inventories, which created a drag on growth.

Final domestic demand – a metric that includes household and government consumption, along with capital investments – fell at an annualized rate of 0.7 per cent. Several analysts said this is an indication that economic conditions are frail in Canada and that overall numbers are being propped up by a resilient U.S. economy.

“The domestic economy appears to be weakening as high interest rates weigh on consumers and businesses,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a client note. “The growth that was seen in the fourth quarter didn’t come from within Canada’s borders and is particularly uninspiring given the population growth seen at the end of last year.”

Many private-sector economists reiterated on Thursday that they expect the Bank of Canada to begin lowering its benchmark interest rate in June, although some investors think there’s a slight chance of that happening in April.

The central bank will make its next interest-rate decision on March 6. Analysts widely expect the bank to hold its policy rate steady at 5 per cent – the highest level since 2001 – for the fifth consecutive meeting.

Bank of Canada Governor Tiff Macklem said in January that his rate-setting governing council is pivoting to a discussion of how long to hold rates at current levels. At the same time, central bankers are hesitant to lower rates too early, in the event that looser monetary policy leads to an acceleration in consumer prices.

Recent economic growth is proving stronger than Bank of Canada projections. “In our view, this will keep the BoC erring slightly on the hawkish side and wait for more evidence that inflation pressures are moderating enough,” Citibank economists Gisela Hoxha and Veronica Clark said in a report. They expect a first rate cut in July.

The household savings rate – the percentage of disposable income left after spending – was 6.2 per cent in the fourth quarter, down slightly from 6.3 per cent in the third quarter. This is much higher than it was before the pandemic, and it suggests people are squirrelling away more money to service their debts, or in anticipation of doing so at a later date, Mr. Mendes said.