With the oil slump having sapped Canada’s energy exports and taken a big bite out of domestic demand, much of Canada’s growth hopes have hinged on improving demand for non-energy exports as the buoyant U.S. economy picks up steam.Todd Korol/Reuters
It's already abundantly evident that Canada's economy ended 2015 with a thud. This week, we'll peg a number to just how resounding that thud was.
On Tuesday, Statistics Canada reports on the country's real (that is, inflation-adjusted) gross domestic product for December, as well as for the fourth quarter and the full year.
The consensus estimate among economists is that the economy eked out a razor-thin 0.1-per-cent annualized growth rate in the fourth quarter – a dramatic slowdown from the 2.3-per-cent annual rate in the third quarter. Indeed, many economists believe the economy didn't grow at all in the final quarter of the year, held back by a renewed slump in prices for oil and other commodities, combined with sluggish growth in the key U.S. export market.
"There is a risk that we could see another contraction to end the year," Toronto-Dominion Bank senior economist Leslie Preston said in the bank's weekly economic note.
The year ended on another low note, after it appeared the economy had gotten back on its feet from a dismal first half. Real GDP contracted slightly in both the first and second quarters, before the third-quarter rebound that proved short-lived. Growth for the full year is estimated at 1.2 per cent, although some economists have suggested it could be even lower.
With the oil slump having sapped Canada's energy exports and taken a big bite out of domestic demand, much of Canada's growth hopes have hinged on improving demand for non-energy exports as the buoyant U.S. economy picks up steam. But the U.S. recovery has hit some road bumps, as a surging U.S. dollar and weak overseas demand slowed American exports and discouraged further expansion by U.S. manufacturers. On Friday, a revised estimate of U.S. real gross domestic product pegged fourth-quarter growth at a tepid 1 per cent, annualized.
The Canadian economy posted no growth in October, then bounced back to a 0.3-per-cent advance in November. But the indicators suggest growth slowed to a crawl again in December, in which economists believe the economy may have added just 0.1 per cent.
While some December indicators looked encouraging – including a 3.9-per-cent month-over-month rise in exports, 2-per-cent growth in wholesale sales and a 1.2-per-cent gain in manufacturing – much of that good news was overshadowed by a 2.2-per-cent slump in retail sales. Housing starts also slowed sharply in December, suggesting a weaker contribution to GDP from the construction sector.
Perhaps the biggest impediment for fourth-quarter growth actually came before the quarter even began, when GDP plunged 0.5 per cent in September. As a result, GDP had to climb substantially from that low starting point in order for the quarter's total GDP to merely come out even with total GDP in the third quarter.
"It automatically put the Canadian economy behind the eight ball into the fourth quarter," said Bank of Nova Scotia economist Derek Holt.
Trade was likely a positive contributor to fourth-quarter GDP growth, but economists at National Bank Financial noted that it was "for the wrong reasons." Both exports and imports were down, but the decline in imports was bigger. Notably, imports of machinery and equipment fell in the quarter, evidence that business investment remains in a funk.
"Any contributions from trade were probably offset by some drag to the economy from investment spending," they said in a research note.
Business investment inflicted the most severe damage on Canada's economy last year, especially from the energy sector, as low commodity prices have deeply eroded corporate incomes and led to dramatic spending cuts in the capital-intensive industry. The country's total business fixed capital formation (that is, investment in physical assets, such as buildings and machinery) fell 5.5 per cent in the first nine months of the year. The Bank of Canada has estimated that for the full year, business fixed investment subtracted one percentage point from real GDP.
On Friday, Statscan reported that corporate profits shrank by 3.1 per cent in the fourth quarter from the third, its second straight quarterly contraction. The downward trend suggests Corporate Canada may continue to keep a tight rein on spending.
"All told, Canada's recession of 2015 may be in the rear-view mirror, but its impact is still being felt in boardrooms and at cabinet tables, leading to belt tightening on all fronts," Ms. Preston said.
David Parkinson