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Rafal Gerszak

Probably the most striking feature of Friday's national accounts release is not the headline number -- annualized growth of 1.8 per cent in the fourth quarter of 2011 -- so much as the upward revision in GDP estimates for the first three quarters of last year. Last November's estimate for the third quarter was revised up my almost two-tenths of a percentage point, and the estimated annualized growth rate was revised from 3.5 to 4.2 per cent.

The Canadian recovery was knocked off track during the debt psychodramas in the U.S. and Europe during the middle part of 2011: GDP fell in the second quarter and the Bank of Canada's estimate for the output gap widened. But these revised GDP number suggest that this derailment was short-lived: the output gap in the third quarter was approximately the same as it had been in the first quarter of 2011.

After the disappointing monthly GDP numbers we saw in October and November, December's 0.4 per cent growth was good news for the fourth quarter as a whole. Although GDP growth of 1.8 per cent is far from spectacular, it is still enough to chip away at the remaining output gap.

Even as the output gap closes, it is very unlikely that the Bank of Canada will move to raise interest rates soon. The federal government -- possibly joined by the Ontario provincial government -- is expected to adopt a contractionary fiscal policy stance in the next few months. Keeping interest rates low will be part of attenuating the effects of a reduction in government spending.

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