Canada’s economy was treading water at the end of last year, according to the latest gross domestic product (GDP) report, but beneath the disappointing data lies resilient consumer spending that is keeping the economy afloat.
According to Statistics Canada, GDP remained unchanged in the fourth quarter of 2022, after five consecutive quarters of growth.
In its report released on Tuesday, the federal agency said the economy contracted 0.1% in December and paints a picture of a much bleaker economy than forecasters had expected, as interest rates higher interest had a more noticeable impact on the economy.
Statistics Canada’s preliminary estimate had forecast annualized growth of 1.6% for this quarter.
But the agency suggests, in another preliminary estimate, that the economy rebounded in January, with real GDP growth of 0.3%. However, she recalled the provisional nature of these data and indicated that their final, more complete version would be published on March 31.
But the report has some silver linings for Canadians. After declining 0.1% in the third quarter, household spending rebounded 0.5% in the fourth quarter.
TD Bank’s director of economics, James Orlando, said the consumer, who is “the real engine of the Canadian economy,” is still doing relatively well.
“Overall, the headlines look really bad. But when we take a step back […]some of the underlying fundamentals are still quite good for the Canadian economy,” said Orlando.
The slowdown in the fourth quarter was largely attributable to businesses hoarding less inventory than in the previous two quarters.
Orlando said inventories had hit record highs earlier in the year due to loosening supply chains. But this accumulation was not to last.
In addition to falling inventories, real business investment fell for a third consecutive quarter as rising interest rates weakened housing investment in 2022.
Savings of Canadians on the rise
Although growth stagnated during the quarter, households’ disposable income grew faster than their nominal expenditures, allowing them to save more.
The federal agency indicated that the household savings rate had reached 6% in the fourth quarter, against 5% in the previous quarter.
The report attributes this improvement in household finances in part to government benefits, including the additional one-time payment of the Goods and Services Tax Credit and the 10% increase in the Old Age Security pension for seniors. 75 or older.
The Liberal government introduced these measures targeting low-income Canadians to help them cope with the highest inflation.
“All of this means that there is more money in the pockets of Canadians and […] Canadians are going to spend more,” Orlando said.
Looking ahead, Orlando said recent economic data was “much better than expected”.
The latest labor force survey showed the economy added 150,000 jobs last month, suggesting hiring activity is still on. Retail sales also increased in January.
These figures support the forecasts of a rebound in economic growth for the month of January.
Even so, most economists expect the Canadian economy to be unable to avoid a recession in the first half of the year as higher interest rates dampen spending.
Since March 2022, the Bank of Canada has raised its key interest rate from near zero to 4.5%, its highest level since 2007.
The central bank announced in January that it would take a conditional pause on its rate hikes while it assesses how the economy will react to higher interest rates.
If the economy continues to run at full speed or if inflation persists, the Bank of Canada has made it clear that it will not hesitate to raise rates further.
But Mr Orlando said the central bank was likely happy with its decision to stay on the sidelines, given Tuesday’s report, which showed weaker GDP.
The Bank of Canada is due to make its next interest rate decision on March 8.
The central bank maintains that a slowdown is necessary to bring inflation back to its target of 2.0%.
After peaking at 8.1% over the summer, Canada’s annual inflation slowed to 5.9% in January.
The Bank of Canada expects inflation to slow to 3.0% by mid-2023 and return to the 2.0% target next year.
She hopes inflation can return to target without a sharp economic downturn. At the same time, the central bank stressed that a return to normal price growth was its main objective, which could come at the expense of a more severe economic contraction.