The Canadian economy stalled during the final three months of 2022 as businesses pulled back dramatically on inventory orders, but consumers ramped up their spending and economic activity moved higher in January to avert a downturn.
Real gross domestic product did not change in the fourth quarter of last year, Statistics Canada said Tuesday in a report. This zero-per-cent growth fell way short of expectations: Financial analysts had predicted annualized growth of 1.6 per cent, while the Bank of Canada had projected 1.3 per cent.
Economic growth has slowed from annualized rates of 2.3 per cent in the third quarter and 3.6 per cent in the second quarter, coinciding with aggressive rate hikes from the Bank of Canada.
Instant reaction: What the Street is saying after Canada’s surprisingly weak GDP report
The flat reading to end 2022 was primarily driven by a significant drop in inventory investments, after a record accumulation in the middle quarters of the year. Many businesses have said they ordered too many goods as supply-chain issues wreaked havoc on global trade over the past two years, leading to a glut of products.
Elsewhere, there was momentum. Household spending in Canada rose by 2 per cent annualized in the fourth quarter, rebounding from a modest contraction in the third quarter. It was a display of resilience from consumers, who are coping with the highest interest rates in about 15 years.
The economy appears to have gotten a boost in the opening weeks of 2023. In a preliminary estimate, Statscan said real GDP jumped 0.3 per cent in January, after a 0.1-per-cent drop in December.
“The stall in Q4 was a surprise,” said Andrew Grantham, senior economist at CIBC Capital Markets. But “when you dig into the details a little more, domestic demand rebounded, which was a positive.”
The numbers are “not quite as weak as they look,” he added.
To bring inflation under control, the Bank of Canada is deliberately trying to cool the economy through markedly higher interest rates that curb demand. Over eight consecutive rate hikes, the central bank has taken its policy rate to 4.5 per cent from 0.25 per cent in March, 2022, the quickest pace of tightening in decades.
At its decision in January, the Bank of Canada announced a “conditional pause” on further rate hikes, although it could resume hiking if inflation doesn’t ease as expected. Analysts predict the bank will stand pat at its next decision on March 8 to assess the lag effects of tighter monetary policy.
The BoC projects the economy will post little growth over the first six to nine months of 2023. Governor Tiff Macklem says the country could experience a “mild recession,” a view that is echoed by many economists on Bay Street.
“It’s not going to feel great. But it is not going to feel like what people think of when you say the word recession,” Mr. Macklem said in an appearance before the House of Commons finance committee in mid-February, referencing the “big job losses” of past downturns.
So far, the labour market has shown few signs of weakening. Canada posted a whopping gain of 150,000 jobs in January, while the unemployment rate of 5 per cent is near a record low.
Tuesday’s GDP report showed that people are still spending, despite the impact of higher borrowing rates. For instance, there was a large increase in vehicle purchases as supply chains improved.
Household disposable income jumped by more than 12 per cent annualized in the fourth quarter. Statscan said this was helped by the one-time GST credit top-up, which the federal government enacted to help lower-income households with inflation, along with a 10-per-cent increase in Old Age Security payments for those 75 and up.
The household savings rate rose to 6 per cent in the fourth quarter, from 5 per cent in the third quarter. This remains higher than the prepandemic average of 3.4 per cent from 2010 to 2019.
There were, however, other areas of contraction. Business spending on machinery and equipment fell 7.8 per cent in the fourth quarter. Housing investment – which consists of new construction, renovations and ownership transfer costs – fell 2.3 per cent as higher rates continued to weaken real estate activity.
The decline in inventory investments created the biggest drag on GDP in more than four decades, not including the early stages of the pandemic.
“Either businesses are deliberately managing down their inventories in anticipation of risks that lie ahead, or improving supply chains are first being met by selling down inventories to meet customer needs,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, said in a note to clients. “I suspect it’s a bit of both.”
Because companies spent less on inventories, imports fell 3.2 per cent in the fourth quarter.
The January bump in GDP follows a rough December, in which a handful of adverse events – airline and railway cancellations; an oil spill in Kansas, which disrupted the flow of Canadian crude oil – weighed on activity.
“January obviously shows that we started the year pretty strong,” said Mr. Grantham. “We don’t expect that to continue, particularly in this high-interest-rate environment.”
With a report from Mark Rendell