Canada: Q4 Real GDP Release Is Less Positive Than It First Appears

Headline GDP was more positive than economists had anticipated. And growth not only came in above expectations in the final quarter of 2023, but Q3 was revised up materially higher as well, though that was partly offset by a an also significant negative revision to Q2. For the year as whole, real GDP advanced by 1.1% in 2023.

The details of the release were less rosy. Final domestic demand contracted in Q4, as a modest advance in consumption was more than offset by a substantial drag from investment, particularly business investment (graph 1). The latter is disheartening considering the urgency to boost productivity. Overall domestic demand has been just about stagnant on average since the middle of 2022, underscoring the effectiveness of the Bank of Canada’s tightening. Trade was the bright spot in the quarter, adding much more to growth than was offset by the drag from domestic demand and a drawdown in inventories. Turning to incomes, corporate profits were solid while compensation of employees slowed from Q3. Regardless, the households saving rate remained at a respectable 6.2% to end the year.

Looking ahead, the positive monthly real GDP data for January point to an acceleration in growth in the first quarter of 2024. We’re currently tracking annualized real GDP growth in the range of 1% to 1.5% in Q1, well above the 0.5% annualized pace forecasted by the Bank of Canada in its January 2024 Monetary Policy Report (MPR).

The upward revision to Q3, beat on Q4, and better-than-projected tracking for Q1 2024 suggest the Bank of Canada will need to increase its growth forecast in the next MPR. The output gap is likely to be less negative as a result. On balance, this should be more inflationary. But with January CPI inflation slowing more than expected, the signals from the Canadian economy have been muddied.

Decent growth and slowing inflation is the sweet spot. However, the lackluster details under today’s release make clear that the Canadian economy is struggling more than the headline would suggest. Real GDP per capita also continues to decline on the back of surging population growth, moving further below its pre-pandemic level in Q4 (graph 2). Consumer and business surveys point to further weakness ahead as well, as sentiment remains soft. Taken together, we don’t think today’s real GDP release moves the needle much on rate cuts beginning in Q2 2024.