After struggling to achieve takeoff last summer, it turns out that Canada’s economy blasted ahead in the fourth quarter at a pace that defied all expectations.
Its five-per-cent annualized growth rate was the strongest in nine years, said Statistics Canada Monday.
This surge of growth, which eclipsed the 3.3 per cent advance expected by the Bank of Canada, was “astonishing,” said Yanick Desnoyers and Marco Lettieri, economists at the National Bank.
You might call it a good news/good news joke.
First, there was the good news analysts expected; a rebound in our depressed exports helped by the revival of Canada’s auto industry from its near-death experience earlier in the year allowed trade to contribute to growth instead of subtracting from it.
But there was more. The other good news the news that blew way past expectations was an explosion in home construction and renovation, noted Peter Buchanan, an economist with CIBC World Markets.
Stimulated both by a recovery in housing demand and by government tax breaks for home renovations, residential investment shot up at a 30 per cent pace, its biggest jump in 24 years.
In fact, practically everything was moving in the right direction during the quarter, pushing a key measure of economic health, final domestic demand, ahead at a vigorous 4.6 per cent rate, faster than in any other G7 nation.
That makes Canada’s recovery less fragile than in most other rich nations, said Capital Economics, a British consulting firm.
Final domestic demand attempts to measure a country’s own homegrown economic growth, excluding the effect of trade and inventory adjustments which can be volatile enough to distort the figures at times like this.
For example, U.S. growth in the fourth quarter appeared to be even stronger than Canada’s, at 5.9 per cent, until you noticed that inventories accounted for about half of this growth.
Inventories all the stuff that companies keep on the shelf and in the warehouse tend to expand when times are improving, but to be cut back sharply when times are tough.
During the deep recession last year, many firms laid off workers and cut production of goods to an absolute minimum, conserving cash by running down inventories instead. Retailers also tried to keep stocks lean.
Such a deep cycle of inventory cutting slashed economic growth sharply for most of last year.
But when the cutting slows and eventually reverses, there’s an mirror-image surge in growth until levels of inventory return to normal.
It was the beginning of this inventory boost which is nice, but only temporary that was such a big factor in U.S. growth in the fourth quarter.
In Canada, though, inventory cutting continued apace in the same period, leaving more solid, demand-driven activity accounting for this country’s rebound in growth. Our inventory boost might be beginning about now.
Before we get too euphoric, however, it’s important to note that most analysts think Canada’s growth rate must slow later in the year. First, the housing market is clearly overheated and will cool as interest rates rise something that could begin as soon as July after this strong growth report.
Second, a slowing of rapid U.S. growth will exert a drag on further export gains.
Still, Canada’s growth could settle down to a still-healthy rate around three per cent to 3.5 per cent, predicts economist Diana Petramala at the Toronto-Dominion Bank.
And the boost in the fourth quarter seems likely to persist into the first quarter, which ends this month. Economic growth in December was significantly stronger than expected, which boosted the starting point from which growth began in this quarter.
Already, we’ve seen the benefit of strong fourth-quarter growth in the job market, which added about 90,000 positions during the period. That strength persisted in January, which saw the creation of another 43,000 jobs.
As a result, Petramala, who had expected to see the unemployment rate remain around 8.3 per cent as discouraged workers returned to the job market, offsetting the employment gains, now thinks job growth could be strong enough to let unemployment edge as low as 8.1 per cent in the next month or two.
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