Weaker GDP Than Anyone Expected Shows Canadian Growth Stalling

(Bloomberg) -- Canada’s economy practically came to a halt in the final three months of 2018, in a much deeper-than- expected slowdown that brings the underlying strength of the expansion into doubt.

The country’s economy grew by just 0.1 percent in the fourth quarter, for an annualized pace of 0.4 percent, Statistics Canada said Friday from Ottawa. That’s the worst quarterly performance in two and a half years, down from annualized 2 percent in the third quarter and well below economist expectations for a 1 percent annualized increase.

While a slowdown was widely expected in the final months of the year due to falling oil prices, it’s a much bleaker picture than anyone anticipated with weakness extending well beyond the energy sector. Consumption spending grew at the slowest pace in almost four years, housing fell by the most in a decade, business investment dropped sharply for a second straight quarter, and domestic demand posted its largest decline since 2015.

The only thing that kept the nation’s economy from contracting was a build-up in inventories as companies stockpiled goods.

“The ‘R’ word will be on minds as Canada’s economy barely skirted the start of a recession in Q4,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note to investors.

The Canadian dollar erased earlier gains and fell 0.3 percent to C$1.3221 per U.S. dollar at 8:43 a.m. in Toronto. The yield on Canadian two-year bonds fell to 1.77 percent, from 1.78 percent. The report will only reinforce expectations that Bank of Canada Governor Stephen Poloz is on a prolonged pause with rates, with its next decision coming next week.

The GDP data makes “next week’s Bank of Canada meeting of interest only to the extent that Governor Poloz pulls further back from his talk about normalizing rates,” Shenfeld said.

Heightened Uncertainty

At the very least, the numbers suggest that heightened uncertainty -- everything from the impact of higher interest rates to potential trade wars and oil-sector woes -- has made a real impact on both consumer and business sentiment. The question now is what the weaker-than-expected data suggests about the economy’s ability to rebound back to more normal growth levels.

Most economists had been expecting the soft patch would come to an end by this spring and growth would accelerate closer to 2 percent for the rest of the year. No one, however, expected the economy would need to come back from such a low point. The Bank of Canada’s latest forecast, from January, is for annualized growth of 1.3 percent in the fourth quarter and 0.8 percent in the first quarter, before the expansion accelerates back to above 2 percent growth by next year.

Until recently, the economy had been doing relatively well even in the face of higher rates. It grew by a Group-of-Seven- best 3 percent in 2017, and expanded at a healthy clip in the first half of last year -- prompting the Bank of Canada to press ahead with higher borrowing costs.

Downward Revisions

But even that strength had been overstated, with Statistics Canada revising down its estimates for first half growth to 2 percent from 2.3 percent. For all of 2018, the economy grew by 1.8 percent -- below the Bank of Canada’s estimate for 2 percent. Monthly data released Friday show the economy ended the year contracting, with December gross domestic product down 0.1 percent.

The data suggest rising interest rates may be having a bigger impact on consumers than expected. Consumption slowed to an annualized 0.7 percent pace in the four quarter, the weakest growth since the start of 2015 as households increased their savings.

Business investment also disappointed, with non-residential capital spending down an annualized 10.9 percent -- the third straight quarterly decline and the second consecutive drop of more than 10 percent. Residential investment also contracted for a second straight quarter, down an annualized 14.7 percent, the biggest drop since 2009.

The economy also wasn’t able to get a contribution from exporters who have helped lift growth over the past year. Exports recorded an annualized 0.2 percent drop in the fourth quarter. Imports also declined, down 1.1 percent.

The biggest contributor to growth came from inventories -- driven by machinery, food and wood producers.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary

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