Surprising data reveals mixed economic signals
Canada has narrowly evaded a recession in the fourth quarter, marking a significant turn of events, though economists caution against premature celebration.
According to Statistics Canada’s report released on Thursday, the country’s gross domestic product (GDP) expanded at a 1% annualized rate in the last quarter of 2023. The result was a surprising uptick following a 0.5% contraction in the preceding quarter, beating Bloomberg analyst estimates.
While the headline figure suggests a resilient economy, analysts are quick to point out underlying weaknesses. Despite the growth, Canada’s economic performance for the year concluded with a modest 1.1% expansion, a stark decline from the previous year’s 3.8% growth.
Charles St-Arnaud, Alberta Central’s chief economist, highlights troubling trends within the data. “The details are not as positive as the headline suggests,” he said. Notably, a 0.7% quarterly decline in final domestic demand, fuelled by a significant drop in business investment, casts shadows over the economy’s trajectory, according to St-Arnaud. This contraction marks the first dip in final domestic demand in a year.
Experts like Doug Porter from the Bank of Montreal emphasize the tepid nature of Canada’s economic growth, particularly concerning per-capita terms, which have seen a decline of over 2% year over year. This decline in GDP per capita, despite a record population growth, raises concerns about the country’s productivity and overall economic well-being. “There’s no debate that growth is nevertheless anemic,” Porter said in a note. He described Canada’s economy to be “just grinding forward” compared to the US.
Concerns over weakeaning GDP per capita
Economists further express unease over the persistently weak GDP per capita, signaling a broader decline in productivity exacerbated by the pandemic’s aftermath. Bryan Yu, chief economist at Central 1, underscores the impact of monetary policy on domestic demand, noting subdued growth in consumer demand and sharp retrenchments in investments across various sectors.
Residential investment declined by 1.7%, while non-residential building investment fell 11.6%. Yu has described this to signal “the pressures from higher interest rates and the broader cyclical economic slowdown on business activity.”
Despite these challenges, most economists do not anticipate immediate action from the Bank of Canada to adjust interest rates. While pressures on credit quality persist, the majority foresee interest rate adjustments not earlier than June, with some suggesting as late as July.
Meanwhile, Canada’s major banks reported mixed earnings, reflecting the nuanced economic landscape. While some banks exceeded expectations, others faced challenges due to higher provisions for loan losses amidst elevated interest rates.
Analysts expressed concern about the upcoming first-quarter earnings, given the heightened interest rates compelling Canada’s leading lenders to augment provisions for potential loan losses.
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