Canada GDP Preview: Forecasts from five major banks, rebound in activity

We look for Canada to avoid a hard landing with real GDP growth of 0.8% after the 1.1% contraction in Q3, as household consumption and residential investment help to underpin expenditure-based growth.

We expect Q4 GDP growth to remain in positive territory with a small annualized increase of 0.5%. That will prevent the economy from seeing two consecutive quarters of contraction, which is often used as the definition of a ‘technical’ recession. But when measured against the country’s rapid population growth, it’s the sixth straight quarterly decline on a per-capita basis, alongside a rising unemployment rate. On a monthly basis, we expect GDP edged up 0.1% in December, building on the 0.2% increase in November but below the 0.3% preliminary estimate from Statistics Canada a month ago, which is highly prone to revision.

Monthly reports published to date suggest a healthy increase in household consumption in the quarter was only partially offset by a contraction in business investment in both the machinery/equipment and structures segments. Residential investment, for its part, could have contracted for the sixth time in the past seven quarters judging by the decrease in housing starts which took in the final three months of the year. Inventory depletion should have weighed on growth, but this could have been counterbalanced by an improvement in net exports (real exports rose and real imports cooled). All accounted for, GDP may have risen 0.7% in annualized terms in the quarter.

Although our call for 0.8% annualized growth is well above the BoC’s expectation for a flat quarter, that will likely be driven by an expansion in the supply side of the economy, which doesn’t pose an inflation threat. Early indicators for activity in January have looked mixed so far, and the January advance estimate for GDP will provide more colour on activity in a month where mild weather conditions could have boosted output.

We expect a 1.3% QoQ increase in Q4 GDP by expenditure, stronger than the BoC’s January forecast of flat growth. Quarterly GDP data, however, have been especially volatile this year (and subject to large revisions). But even a softer increase in output than expected would likely not significantly increase the chance of much sooner rate cuts given that the BoC has been expecting stagnant activity in Q4. Modestly stronger growth in Q4 and H1 should keep BoC officials erring slightly on the more hawkish side.