February 28, 2023 | 09:22
Cdn GDP: Frosty End to 2022, Hot Start to 2023
The Canadian economy ended 2022 with a bit less spunk than expected, although the early read on January was solid. Real GDP was flat (0.0% annualized) in Q4, well below the preliminary estimate of 1.5%, and by far the coolest quarter of 2022. December alone was down 0.1% (flash was flat). The soft quarterly result was driven by a big drag from inventories (alone slashing -5.6 ppts from growth), reversing a massive build in the prior two months. Net exports were firmer than anticipated (adding 4.7 ppts, and nearly offsetting the inventory drag). One way to look at these divergent trends—after loading up the shelves with imported goods in two earlier quarters, firms reduced imports in Q4. Otherwise, the details were generally in line, with consumer spending up 2%, residential investment falling nearly 9%, and government spending solid at nearly 4%. Business investment was softer than expected, with a 27% plunge in machinery and equipment far outweighing the 10% increase in non-residential construction. The soft quarterly result clipped the full-year gain in GDP to 3.4% (from earlier estimates of 3.6%), compared with 2.1% in the U.S., 3.6% in the Euro Area and 4.0% in Britain last year.
For December, GDP fell 0.1%, a tick below expected driven by a 4% drop in mining/oil/gas. The latter was due to maintenance and a pipeline leak, and looks to have since reversed. There were also declines in wholesale and transportation, while retail and professional services saw the largest increases.
The January GDP flash estimate was +0.3%, setting up for a rebound in Q1, especially as inventories have now largely normalized and a (mostly) mild winter helped boost activity. Even if the next two months are only flat, GDP growth for all of Q1 will be about 1.0% (we had 0.5% pencilled in). Still, at this point we are relatively comfortable with our full-year call of a modest 0.7% rise for 2023 GDP.
A few notables: The personal savings rate picked back up in Q4 to 6.0% from 5.0% in Q3. For all of 2022, it also averaged exactly 6.0%, down from the towering 11.0% average in 2021, but still well above pre-pandemic trends (of closer to 2.0%). Meantime, nominal GDP dipped for the second quarter in a row as the GDP deflator fell heavily on lower energy prices. Even so, for all of last year, nominal GDP rose a hefty 11.0% for 2022, the second strongest year in the past 40 (behind only 2021). Canada's annual nominal GDP rose to $2.8 trillion last year—it only hit $2 trillion in 2016, and $1 trillion in 1999.
Bottom Line: Today's mostly soft report won't be a disappointment to policymakers, as the Bank of Canada is openly attempting to take some steam out of the economy. And zero-point-zero growth is about as little steam as one could ask for, without pushing things into an outright downturn. The late-year softness was compounded by weak oil and auto production, and growth looks to have firmed a touch at the start of 2023. Growth will need to hold below potential (about 2%) to dampen excess demand and reduce inflation pressures. Today's result simply reaffirms that the BoC will be on hold at next week's decision, and if growth remains below potential—as we expect—they will likely stay on the sidelines. The key for the Bank will be whether the bounce in January GDP was the start of a trend, or a one-off weather-related fluke; we suspect it's mostly the latter.