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Canadian Economy Delivers Solid Growth in Final Quarter of 2016

March 02, 2017

The Conference Board of Canada’s Chief Economist Craig Alexander offers the following perspectives/insights:

Quote

“The Canadian economy delivered solid, and above expected, growth in the final months of 2016. This is positive news and provides a good handoff to 2017. It sets the stage of healthy, but moderate, growth of slightly above 2 per cent this year,”
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.

Insights

  • The Canadian economy beat expectations in the final three months of last year, posting an annualized gain of 2.6 per cent vis-à-vis market expectations for an increase of 2.0 per cent. The key drivers of economic growth in the quarter were consumer spending, residential investment and net exports (with a rise in exports and a decline in imports).
  • The outturn was well above the Bank of Canada forecast in the January Monetary Policy Report of 1.5 per cent. The Bank flagged the likelihood of this outcome in the recent rate announcement, although the actual result may have been even greater than they anticipated. The solid economic growth reinforces the view that while the Bank may talk about a rate cut being a possibility, the odds of them delivering a cut is very low unless geopolitical risks (like U.S. protectionism) materially weaken Canada’s economic performance.
  • The Canadian economy grew a healthy 0.3 per cent in December, with goods-producing industries advancing 0.5 per cent and service-producing industries expanding 0.2 per cent. This provides a decent handoff heading into the first quarter of 2017. 
  • With the tally for the year now in, the Canadian economy delivered modest growth of 1.4 per cent in 2016. This reflected a particularly weak first half of the year, but a solid performance in the second half of 2016. This is consistent with the view that the fallout from the commodity shock of two years ago is abating.
  • While today’s numbers are quite positive, we remain cautious about the economic outlook. Given the handoff, the Canadian economy is likely to deliver growth of slightly above 2 per cent in 2017. This moderate growth reflects several economic headwinds. First, business investment remains weak and lack of capital investment will constrain productivity and production capacity in some industries. Geopolitical risks may also limit the appetite for large scale investments in the near-term. Second, household expenditures and real estate cannot be the main drivers of economic growth indefinitely. While job creation has been strong, labour compensation has been weak. The recent strength in household income growth has been temporarily boosted by the expanded Canada Child Benefit. Given the high level of household indebtedness, consumer spending should moderate. And, while the Bank of Canada will remain on hold this year, borrowing costs will likely increase as bond yields advance in an environment of monetary tightening by the Federal Reserve. Accordingly, the pace of economic growth in the fourth quarter cannot be maintained, and the economy should post more modest growth going forward.

 


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Photo of Craig Alexander Craig Alexander
Senior Vice-President and Chief Economist

Craig Alexander brings over 19 years of experience in the private sector as an economic and financial forecaster to the position of Senior Vice President and Chief Economist. He oversees the Board’s macro-economic outlook products, custom economic and tourism research.

Follow Craig on Twitter

@CraigA_Eco


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