The Canadian economy bounced back sharply in the final quarter of 2023, driven by higher goods production and shipments and stronger U.S. demand.
Preliminary estimates say gross domestic product grew 0.3% in December, Statistics Canada reported Wednesday in Ottawa. That followed a 0.2% expansion in the previous month, exceeding forecasts for 0.1% in a Bloomberg survey of economists.
Overall, the industry-based numbers point to growth of 1.2% on an annualized basis in the final three months last year, reversing a third-quarter contraction. The figures suggest Canada's economy was being pulled along by robust consumer spending in the United States to close out 2023, and was expanding at a faster rate than the Bank of Canada's projections. The central bank's forecast was for flat fourth-quarter growth.
Although the data will likely be revised on Feb. 29 when the income and expenditure-based figures for the fourth quarter are published, they show an economy that has managed to avoid a prolonged contraction so far.
The show of economic strength may buy the Bank of Canada some time to put off interest rate cuts until it's confident about the downward momentum in inflation. But the growth is also partly because of population increases. On a per-capita basis, the Canadian economy has been shrinking.
"With the solid end to 2023, this clearly points to upside risk for our 2024 call of just 0.5% GDP growth," Doug Porter, chief economist at Bank of Montreal, said in a report to investors. "Given the recent large upward revisions to U.S. growth, it's far from shocking that Canada's pace could also get a lift, with 1% growth entirely within reach this year. Of course, as we so often like to point out, that's still very modest when stacked up against rollicking population growth."
Last week, the central bank held its policy rate at 5% for a fourth straight meeting. Gov. Tiff Macklem said discussion of monetary policy is now shifting to how long it needs to stay at the current level -- policymakers don't expect to increase borrowing costs again if the economy evolves in line with their forecasts.
The central bank sees growth accelerating around mid-2024, with household spending picking up while exports and business investments get a boost from foreign demand. It's forecasting 0.8% GDP growth this year and 2.4% in 2025.
"I think this will give the Bank of Canada pause, but I don't think it dramatically impacts their pace," Dennis Mitchell, chief executive officer of Starlight Capital, said on BNN Bloomberg Television. "We have waves of mortgage refinancing that are going to put significant downward pressure on consumer spending and household disposable income."
Wednesday's figures suggest that when the final numbers come in, they'll show the Canadian economy grew 1.5% last year.
Information for this article was contribute by Erik Hertzberg and Derek Decloetof Bloomberg News.