Canada's economic growth slowed markedly in the fourth quarter of 2011, albeit with some underlying strength that could carry it into 2012, leaving the Bank of Canada with continued room to hold interest rates at historic lows. Statistics Canada said on Friday growth had fallen to an annualised 1.8 percent in the fourth from a sharply upwardly revised 4.2 percent in the third, as positive temporary factors faded and as government stimulus continued to wind down.
The 1.8 percent real growth rate was exactly as expected in a Reuters survey of analysts but fell short of the 2.0 percent the Bank of Canada had predicted in its January Monetary Policy Report. US growth was 3.0 percent in the fourth quarter. In December the economy grew at 0.4 percent from November, higher than the 0.3 percent forecast and rebounding from November's 0.1 percent drop.
"A lot of the details are better than expected. First of all there were upward revisions ... The monthly number was a bit stronger than expected, so we head into 2012 with a touch more momentum than expected," BMO Capital Markets deputy chief economist Doug Porter said.
The Bank of Canada's forecast in January was for growth of a mediocre 1.8 percent in the first and second quarters of 2012 before accelerating to 2.1 percent in the third, 2.6 percent in the fourth, and 3.1 percent in the first half of 2013. It is unanimously expected to keep its policy interest rate at 1 percent on March 8, and most forecasters do not see a rate hike until the second quarter of 2013.
"I think the Bank of Canada is on hold for an extraordinary period of time and this GDP (gross domestic product) number is unlikely to push them in either direction away from that," said Camilla Sutton, chief currency strategist at Scotia Capital. Consumer spending, exports and business investment contributed the most to the fourth quarter growth. But the increase in exports, housing investment and business inventories were much weaker than in the third quarter, and government capital spending fell by 5.1 percent.
The third quarter had been especially strong as a rebound to a 0.6 percent fall in the second that was partly due to Japan's earthquake and tsunami. Statscan revised third quarter growth to 4.2 percent from 3.5 percent as consumer spending and business investment were stronger than first thought.
For 2011 as a whole, growth came in at 2.5 percent after a 3.2 percent rise in 2010. The most striking contrast between the two years was that government capital investment on things like roads fell 2.9 percent after jumping 17.9 percent in 2010 due to the government's economic stimulus program. In December half of the gain was due to oil and gas output. Manufacturing, wholesale, finance, insurance and construction also rose while retail and utilities fell. "It is suggesting some of that weakness in the fourth quarter was transitory and we're already seeing indications by the end of the quarter that weakness was reversing," Royal Bank of Canada assistant chief economist Paul Ferley said.
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