Canadian Gross Domestic Product Flash Report: Fourth-Quarter 2009

• The Canadian economy grew at a robust 5.0% (annualized) during the fourth quarter of 2009; while the recession in the first half of 2009 was deeper than earlier reported, third-quarter real GDP growth was bumped up from 0.4% to 0.9%.
• Consumer expenditures advanced by a solid 3.6%. The advance was dominated by a sharp 10.7% annualized leap in durable goods, namely motor vehicles and household furniture and equipment.
• First-quarter 2010 consumer expenditure growth is expected to be strong as well, owing to the impact of the Olympic Games, especially in British Columbia.
• Spurred by the fiscal stimulus program, government investment in fixed capital formation leapt at a 16.3% annualized rate in the quarter, on top of the solid 25.1% annualized advance in the previous quarter.
• Canada's housing sector is recovering well ahead of the U.S. sector; real residential investment surged at an astounding 29.7% annual rate.
• Business investment, however, remains weak. It fell 8.8% after a temporary increase in the previous quarter, as nonresidential construction activity fell 8.5% and investment in machinery and equipment dropped 9.2%.
• Foreign demand was strong, as Canadian exports gathered steam in the fourth quarter. Exports grew at a double-digit pace (15.4%) for the second consecutive quarter.
• Inventories declined—the increased rate of inventory liquidation deducted around 0.3 percentage point from growth—but inventories are extremely lean.
• The overall GDP deflator rose by a relatively tame 0.6% year-over-year.

Outlook

The recovery is gathering momentum, as the Canadian economy accelerated from an upwardly revised growth rate of 0.9% in the third quarter of 2009 to 5.0% in the fourth quarter of 2009. Lashed together with growth of 5.9% in the United States in the same quarter, this is leading the charge for recovery among industrialized countries.

Growth was propelled by strong consumer spending, residential investment, and strong government investment spending. The contrast with the United States is that U.S. business equipment investment was strong in the fourth quarter, where Canada still has not seen as strong a break-out, while conversely U.S. consumer spending is not as strong as Canada's.

Not surprisingly, non-residential construction was weak on both sides of the border.

The outlook for Canadian growth in 2010 looks promising. In particular, real growth will get a nice boost from the Vancouver Olympic Games in the first quarter of 2010.

Inventories are lean, and business equipment investment is expected to pick up as corporate earnings are expected to get a shot in the arm from strong growth in North America, although the strong Canadian dollar may exert some drag on export revenues.

The Canadian dollar, which has traded in the mid-90s for several months, moved up even further to near 97 U.S. cents in response to the robust real growth report, and recently it has gained momentum from steady increases in crude oil prices in particular. Canadian oil and gas rig counts are now moving up with considerable momentum.

The really good news from the strong Canadian real GDP report was that—similar to the United States—Canada is seeing low inflation and fairly good productivity gains in the early quarters of the recovery. That bodes very well for its sustainability. Moreover, core inflation in Canada is actually running below the comparable core inflation rate in the United States.

With the Canadian dollar under further upward pressure, there is not a strong case for the Bank of Canada to raise interest rates. Indeed, the United States and Canada are now acting as locomotives for the recovery in the industrialized countries, with Japan and Europe in particular well behind the curve.

With no inflation threat imminent, it would be wise to let this process run for several more quarters in 2010.