Canadian economy expands 2.9%

The fourth quarter had an annualized growth rate of 2.9 per cent – four-tenths of a point better than the general estimate of 2.5 per cent – but Statistics Canada also upgraded growth numbers in both the first and second quarters covering the first half of 2014.

The only fly in the ointment detracting from a strong GDP report was that December was even poorer than expected, as output fell 0.5 per cent from November, the biggest monthly setback since March 2009.

But while the December pullback will affect the early part of this year, the report overall will be seen as good news by markets and a sign that the Canadian economy may be on its way to a stronger year.

The loonie was up 0.21 of a cent to 90.01 cents US as the American dollar weakened against several currencies.

“With the understanding that part of the broad weakness (in December) can be ascribed to severe weather conditions, payback can be expected, although it is yet unclear the extent to which Canada has been as affected by the weather in January,” economist Jimmy Jean of Desjardins Capital Markets wrote in a note to clients earlier this week.

Economists had projected GDP would rise 2.5 per cent annualized in the fourth quarter, while falling 0.3 per cent in December.

Earlier this week, Finance Minister Jim Flaherty said he was hopeful that the economy would prove stronger in 2014 than the 2.3 per cent he projected in his February budget.

Despite the strong results, most analysts agree it is unlikely the Bank of Canada will be tempted to tighten monetary policy at next week’s interest rate setting.

The consensus is that the bank won’t start raising interest rates, which remain at near historical lows, until 2015. But the strong economic numbers, if it they are followed by a good jobs creation report next week, will likely all but end speculation of a possible rate cut unless the economy suffers a drastic reversal.

For the final quarter of 2013, the agency said most major industrial sectors increased production as goods producing industries advanced 0.7 per cent over the previous month, non-annualized. Mining and oil and gas extraction grew 1.8 per cent, while manufacturing bounced back by 0.8 per cent after two flat quarters.

Another positive was the business investment in machinery and equipment bounced back smartly by 0.8 per cent following three quarters of declines. However, business investment in non-residential structures fell.

Exports – a sector the Bank of Canada believes is essential for the economy – rose 0.4 per cent in the quarter, after a flat third.

The central bank will also welcome the news that the savings rate of Canadian households increased by five per cent in the fourth quarter, as disposable income grew at a faster pace than spending.

The bank has been warning about the high levels of household debt for several years and urging Canadians not to get in over their heads, particularly in the housing market.

Taking some of the sheen off the numbers, the agency noted that inventories grew during the quarter.

For December, the agency said the weakness was registered across the economy, with both goods-producing industries and services registering declines as manufacturing, retail and wholesale trade and construction all fell. While some could be attributed to the weather, it is not clear whether the economy was also due for a respite following five straight months of advances.

In revisions that helped the annual growth number, Statistics Canada said the economy had advanced by 2.9 per cent and 2.2 per cent respectively in the first and second quarters of 2013. It had previously recorded those growth rates as 2.3 and 1.6 per cent. The 2.7 per cent rate in the third quarter was left unchanged.