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The Canadian economy ended 2020 on a surprisingly good note and momentum is carrying into the new year, the latest evidence that growth is poised for a staggering rise in the coming months as pandemic restrictions are phased out.

Real gross domestic product grew 2.3 per cent in the fourth quarter, or by 9.6 per cent at an annualized pace, Statistics Canada said Tuesday. That was well ahead of expectations. Still, the economy shrank 5.4 per cent in 2020, the worst annual reading in decades.

Heading into Tuesday’s release, the fear was that economic activity would contract in January, given ample restrictions to contain the second wave of COVID-19. However, Statscan estimated that real GDP grew by 0.5 per cent that month, accelerating from a meagre 0.1-per-cent gain in December, on strength in construction and manufacturing.

That suggests momentum is picking up to start the year – and that once again, the Canadian economy is outrunning expectations in the recovery phase. The Bank of Canada’s forecast for the first quarter – a 2.5-per-cent annualized drop – could prove way off the mark, especially now that provinces have started to unwind their restrictions.

Furthermore, the GDP results arrived at a time of vigorous debate over the inflation outlook, with investors and central bankers increasingly at odds. Bond yields have jumped higher this year, a sign that traders expect inflation and interest rates to rise as the recovery heats up. For its part, the Bank of Canada says economic slack won’t be absorbed and inflation won’t sustainably hit its 2-per-cent target until 2023, thus leaving its policy rate on pause for the next couple of years.

“The massive monetary stimulus is looking a tad out of place in a forward-looking sense,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia, in a note to investors. The Bank of Canada “should be altering the narrative as the stimulus put in place almost a year ago was set for a very different world than the one we’ve transitioned toward.”

It appears that companies are gearing up for a rebound in consumer spending. Most of the fourth-quarter GDP gain was driven by an increase in inventories, following a drawdown in the previous quarter. The retail sector was a key contributor, with stockpiling seen at motor vehicle, building supply and sporting goods stores.

Housing investment increased 4.3 per cent last quarter, with gains in new construction (4.1 per cent), renovations (4.8 per cent) and ownership transfer costs (4.1 per cent). For the year, housing investment rose 3.9 per cent, making it a rare area for growth.

Consumption was a dicier aspect of Tuesday’s release. Household spending fell 0.1 per cent in the fourth quarter. Growth in services spending slowed to 0.2 per cent, from 9.7 per cent in the third quarter, reflecting the latest round of restrictions.

But with fewer places to spend, Canadians are saving loads of cash. The household savings rate stood at 12.7 per cent in the fourth quarter and 15.1 per cent for the year. Two banks recently estimated that excess savings have reached about $200-billion.

Despite historic disruptions to the labour market, household disposable income jumped 10 per cent over the year “as governments took extraordinary economic support measures during the year,” Statscan said, with federal aid that exceeded lost wages.

Given Tuesday’s results, Bank of Montreal upgraded its forecast for Canadian growth in 2021 by a full percentage point to 6 per cent.

“Part of the reason we look for strong growth this year is because of the mass of excess savings,” BMO chief economist Doug Porter said in a research note. He also credited the potential for robust U.S. growth and strong commodity markets in the upgrade.

“It’s not precisely a V-shaped recovery,” he said, “but it’s very close.”

Analysts widely believe the U.S. economy will outgrow Canada’s in 2021, much like it did last year.

“In short, we still need a steep climb to restore economic normalcy, and we’re running a bit behind the U.S. in getting the vaccines that will take us there,” Avery Shenfeld, chief economist at CIBC World Markets, said in a report.

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