The Canadian economy ended 2022 on a flat note, but the early read for January was positive. Real Gross Domestic Product (GDP) flatlined (0.0% annualized) in Q4, which was well below the preliminary estimate of 1.5%. Inventories were the big drag in December as the massive gains in the prior two months were unwound.
Domestic demand grew by 1.0% annualized in Q4, after falling in the previous quarter. The main driver for the increase in domestic demand was the delivery of vehicles ordered during the pandemic which pushed durable goods consumption up (14.2%). This surge in buying was more a supply chain issue related to manufacturers’ improved ability to meet demand, rather than a change in consumer behaviour.
As expected, residential investment contracted in the fourth quarter, falling 8.8%. This was the third consecutive quarter of decline and is not a good sign for housing affordability. Non-residential investment in structures gained 10.2%, but this did not offset the large decline in machinery and equipment (-27.6%) resulting in a fall in non-residential business investment ( -5.5%).
In nominal terms, GDP fell 2.7% as prices contracted for a second straight quarter. Terms of trade (the ratio of the export price index to the import price index) fell by 1.2% on weaker commodity prices. This fed into net operating surplus (a close proxy for business profits) which fell by 40.7% in the quarter. Nevertheless, for all of last year, nominal GDP rose 11.0% for 2022, the second strongest year in the last 40.
In January, the Bank of Canada forecasted that GDP would grow by 0.5% in the fourth quarter of 2022. The actual flat Q4 number is a positive indicator for the Bank, as it is seen as evidence that its earlier actions are taking steam out of the economy. While the January flash estimate of 0.3% GDP growth sets up expectations for a rebound in Q1, we expect that these numbers reaffirm the Bank’s position to keep rates on hold at the next policy meeting on March 8.
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