The 9.6% annualised gain in fourth-quarter GDP was three times as strong as the consensus forecast from just a couple of months ago. The preliminary estimate that GDP grew by 0.5% m/m in January confirms that the economy continued to shrug off the latest coronavirus restrictions at the start of the year too.
Economy continues to outperform expectations
- The 9.6% annualised gain in fourth-quarter GDP was three times as strong as the consensus forecast from just a couple of months ago. The preliminary estimate that GDP grew by 0.5% m/m in January confirms that the economy continued to shrug off the latest coronavirus restrictions at the start of the year too.
- The 9.6% expansion was also stronger than the preliminary estimate of 7.5% that Stats Can released last month, even though the gain in December, of just 0.1% m/m, was weaker than the 0.3% initially signalled. The effect of the latest coronavirus restrictions was clear, with household consumption edging down by 0.4% annualised in the fourth quarter, in part due to large falls in spending on high-contact services. Net trade also weighed on GDP as the 10.8% annualised rise in imports far outpaced the 5.0% gain in exports.
- Yet the jump in imports partly reflected a rebound in inventory building, which contributed strongly to the overall gain in GDP, and a rebound in investment, which rose by 10.6% annualised. Machinery and equipment investment increased by 4.2% and residential investment performed even better, increasing by a further 18% amid strong home sales and new construction.
- All this still means GDP slumped by 5.4% in 2020 and remained 3.2% below its pre-pandemic level in the fourth quarter. That is worse than the peak-to-trough declines in GDP in most recessions, and means Canada underperformed the US last year. (See Chart 1.)
- Nevertheless, Canada closed the gap in the fourth quarter and the preliminary estimate for January, that GDP rose by 0.5% m/m, shows the economy continued to cope well even as the coronavirus restrictions were tightened. With GDP likely to grow at a similar pace in February and March now those restrictions are being eased, first-quarter growth should also be much stronger than most expected just a couple of months ago. Other forecasters, including the Bank of Canada, will have to cross out their predictions for a first-quarter decline, while we will have to upgrade our forecast from a 1% expansion to closer to 4%.
Chart 1: GDP (Index, Q4 2019 = 100)
Table: Real GDP (%q/q Annualised)
Final Domestic Demand
Stephen Brown, Senior Canada Economist, +1 416 874 0517, firstname.lastname@example.org