Canada’s Economy Grows 6.7% Annualized Despite Omicron Lockdowns

(Bloomberg) -- Canada's economy grew at a robust pace in the fourth quarter and was more resilient than expected in January, teeing up a Bank of Canada interest-rate hike this week.

Output expanded by an annualized 6.7% in the three months through December, led by business spending, Statistics Canada reported on Tuesday in Ottawa. That followed growth of 5.5% in the third quarter, bringing output back to pre-pandemic levels. Economists were anticipating a 6.5% advance for the economy in the fourth quarter.

Economic output was flat in December. But preliminary data show a 0.2% monthly gain in January, even after the nation was hit by a wave of Covid-19 cases and fresh lockdowns.

Overall, the reports show that underlying economic conditions remain strong, with plenty of pent-up demand stoking the expansion and businesses racing to replenish inventories and catching up on investment.

That's despite a successive series of headwinds. After floods in British Columbia in November and the emergence of the omicron variant in December, Canada was hit by major border blockades last month and is now bracing for potential turmoil from Russia's invasion of Ukraine.

Fourth-quarter output was better than the Bank of Canada's recent estimate of 5.8% annualized growth, and will only reinforce investor views the central bank is about to begin a series of interest rate increases as early as this week. The central bank has said the economy has already run up against its capacity limits and no longer needs extraordinary levels of monetary stimulus.

Hiking Cycle

Policy makers led by Governor Tiff Macklem are expected to raise their policy rate by a quarter percentage point on Wednesday, with markets pricing in seven hikes over the next 12 months.

“This is just another green light for the Bank of Canada to proceed with rate hikes, despite the flashing amber from geopolitical events,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors.

The Canadian dollar reversed losses after the gross domestic product figures were released, and was up 0.1% to C$1.267 per U.S. dollar at 9:56 a.m. in Toronto trading.

Businesses led the expansion in the fourth quarter, ramping up inventories and spending more on machinery and equipment. Non-residential business investment rose by an annualized 8.7%. Inventory accumulation was the biggest contributor of growth as supply constraints eased, representing almost two-thirds of the 6.7% annualized gain.

The trade sector was a modest drag as imports outpaced a sharp increase in exports. Household consumption slowed to a 1% annualized pace in the fourth quarter.

What Bloomberg Economists Say...
“Russia's invasion of Ukraine will keep upward pressure on commodity prices, a positive for domestic income provided confidence shocks remain limited. We expect the Bank of Canada is still on track to begin rate hikes at the March 2 meeting amid elevated inflation.”
--Andrew Husby, economist
For the full analysis, click here

For all of 2021, Canadian GDP expanded 4.6%, the biggest increase in two decades. That's after the economy shrank the most in more than six decades in 2020.

Household spending and residential construction were the largest growth contributors for the year, reflecting the reopening of the economy. Working from home, growing savings and low mortgage rates also boosted spending on housing.

Analysts expect strong consumption to continue over the next two years, generating strong growth that will be supported by household savings and employment gains. The Bank of Canada is projecting growth of 4% in 2022 and 3.5% in 2023 -- well above recent historical trends.