Canada’s Economy Outpaces the US

Although Canada's economy has yet to shift to export-driven growth, that didn't stop the country's gross domestic product (GDP) from powering through the fourth quarter with 2.9 percent annualized growth. That beat private-sector economists' consensus forecast by a significant three-tenths of a percentage point, based on a survey by Bloomberg, and it was also an acceleration of two-tenths of a point from the third quarter.

Growth in prior quarters was also revised higher, with the first quarter coming in at 2.9 percent versus the initial estimate of 2.3 percent, while the economy grew at a 2.2 percent annualized rate in the second quarter, as opposed to the earlier estimate of 1.6 percent.

Even better, Canada's economy actually grew a tenth of a point more than the US economy for full-year 2013, with each country's GDP climbing 2 percent and 1.9 percent, respectively. However, the US economy has exhibited slightly greater momentum in more recent quarters, which should ultimately be helpful toward Canada's eventual rebound, as the US is Canada's largest trading partner.

As we've written on numerous occasions, Bank of Canada Governor Stephen Poloz is hoping the country's economy will transition from its dependence on consumer spending in favor of exports and business investment.

The trade deficit widened in December, to CAD1.7 billion, though we did note a few positive trends among the underlying data in our most recent issue. Nevertheless, trade still added about two-tenths of a point to fourth-quarter growth, with exports outpacing imports by 1.7 percent versus 0.9 percent.

Meanwhile, business investment fell 1.9 percent during the fourth quarter, though spending on machinery and equipment climbed by more than 3 percent annualized after three quarters of consecutive declines.

The debt-burdened Canadian consumer continues to be a big part of the story, with consumer ! spending rising by 3.1 percent annualized during the fourth quarter, despite bad weather in December. In fact, consumer spending was seven-tenths of a point higher than in the prior quarter.

The other major part of the story is the substantial rise in inventories, which jumped to CAD18.1 billion from CAD12.4 billion in the third quarter, accounting for about half the gain in GDP. Of course, this will likely detract from growth in GDP in subsequent quarters until inventories are drawn down.

Indeed, while we should take a moment to revel in the upside surprise of these data, it's important to note that economists predict growth will slow to a 2.1 percent annualized pace during the first quarter.

Subsequent quarters are expected to show a modest reacceleration, with full-year 2014 GDP projected to grow by 2.3 percent according to the Bank of Canada (BoC) as well as the consensus among private-sector economists. As we've noted previously, the central bank has said GDP must grow at a 2.5 percent annualized pace to remove excess slack from the economy.

The fourth-quarter results along with the 1.5 percent increase in the consumer price index (CPI) during January, which beat expectations by two-tenths of a point, will likely forestall another rate cut by the BoC, at least for now.