GDP stall puts Canada on thin ice even before coronavirus

Shelly Hagan

Canada’s economy had already slid to a near halt in the fourth quarter even before fallout from the coronavirus reverberated through global markets.

Gross domestic product grew at an annualized pace of 0.3% – essentially a stall – in the three months through December, the slowest quarterly pace of growth since 2016. Previous hopes for a quick rebound in 2020 are fading as new infections and deaths from the virus continue to climb, with no end in sight.

Economists are cutting 2020 growth forecasts in the face of coronavirus spreading globally to near pandemic proportions, with real-time data and early indicators starting to show the pain. Odds of a Bank of Canada rate cut at the March 4 meeting have tripled in a week to more than 60%, and investors are betting a move is a sure thing by April.

“The key point is that the economy already had precious little momentum heading into the new year, and was thus more vulnerable to a downside shock,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors.

The fourth-quarter slowdown was largely anticipated by economists and the Bank of Canada, and marks a second-straight quarterly deceleration after growth came in at 1.1% in the prior period. The quarter ended on a more positive note than most analysts anticipated, with a 0.3% expansion in December, the fastest monthly pace of growth since May.

Growth was expected to accelerate in the first half of 2020, after temporary factors such as a week-long rail strike, manufacturing plant disruptions and pipeline shutdowns stunted growth at the end of last year, particularly in October and November.

Some of those losses were recouped in December, but propbably not enough to change the view that Canada’s economy remains fragile and the Bank of Canada may be forced to cut rates, especially in light of the recent turmoil from the coronavirus and domestic rail disruptions.

For all of 2019, the annual growth rate of Canada’s real GDP came in at 1.6%, down from 2% in 2018. Until recently, most economists had expected a similar pace of growth in 2020, but that’s changing. Porter said BMO has cut its forecast for this year to 1.2%, from 1.7% previously.

The Canadian dollar was down 0.3% to C$1.3437 against its U.S. counterpart at 10:36 a.m. Toronto time. Markets are anticipating at least two rate cuts over the next six months, and a third by this time next year.

Strong Consumption

The saving grace for the economy was household spending, helped by a strong labor market. Consumption rose 2% annualized in the fourth quarter. Still, Canadians are mostly buying non-durable goods and services, which suggests they may be wary of big ticket purchases. Another sign of caution: the household savings rate rose to 3% in the fourth quarter, matching the highest since 2017.

Businesses had a tough quarter, perhaps reflecting the heightened global trade tensions at the end of the year. The drop in exports was the biggest downward contributor to fourth-quarter output, falling 5.1% annualized, the biggest drop since 2017. Business investment contracted 3% in the fourth quarter after an 8.4% expansion in the previous period. Investment in machinery and equipment fell 13.5%.

Another weak point is that supply chain disruptions drove business inventories higher at the end of last year, contributing 0.6% to the annualized growth rate. If businesses hadn’t chosen to increase inventories, the economy would have contracted. This could potentially drag on 2020 growth if firms decide to meet demand by drawing down stockpiles.

Residential investment decelerated to an annualized pace of 1.1% in the fourth quarter from 13% in the prior quarter. Non-residential investment shrunk by an annualized 6.3%, more than offsetting the pickup in capital spending in the third quarter. Domestic demand – which excludes the trade sector and inventories – remained sluggish, growing at just 0.7% on an annualized basis.

With assistance from Erik Hertzberg.