Canada’s Economy Sees Growth, Avoiding Technical Recession

Summary

  • GDP in Canada likely grew by 0.3% in December, leading to an annualized growth of 1.2% in Q4, according to Statistics Canada’s preliminary estimate.
  • This growth indicates the Canadian economy may have dodged a technical recession in the latter half of the previous year.
  • The Bank of Canada (BoC) maintains its 5% overnight rate, and its focus is shifting towards when the borrowing costs could decrease.
  • Industries such as agriculture, mining, and construction led November’s growth, marking the highest growth rate since January 2023.
  • The US economy, Canada’s primary trading partner, surpassed predictions with its Q4 growth rate.

Canada’s Economic Upsurge in Q4

Statistics Canada’s preliminary assessment reveals a 0.3% increase in Canada’s GDP in December, signifying 1.2% annualized growth in the fourth quarter. Contrariwise, it had declined by 1.1% in Q3. As a result, the chances of the Canadian economy falling into a technical recession (two successive quarters of contraction) second half of the previous year are slim.

Positive Outlook for the Canadian Economy

Desjardins Group’s Head of Macro Strategy, Royce Mendes suggests that Canada’s economy rebounded strongly towards the end of the previous year. If the projected December growth is confirmed, the economy will have outpaced the BoC’s previous Q4 growth rate prediction of zero. The BoC Governor, Tiff Macklem anticipates no economic downturn.

Bank Of Canada’s Interest Rate

The Bank of Canada has frozen its overnight rate at 5% for the past five months, shifting its attention to the timing of decreasing borrowing costs as opposed to future hikes. This resilience could enable BoC to maintain these rates until mid-year, as per Mendes. Following the release of these growth figures, the betting markets adjusted their April rate cut probability from 51% to 42%.

Canadian Dollar and Growth Industries

The Canadian dollar remained relatively stable at 1.34 per U.S dollar or 74.63 U.S. cents despite recouping an early downturn. The primary contributors to November’s growth were goods production sectors, including agriculture, mining, and construction, boasting the highest growth rate since January 2023, according to Statscan’s report. These sectors expanded 0.6% monthly in November, while the service-production sector showed a 0.1% growth.

US Economy and its Impact on Canada

The U.S economy, Canada’s largest trading partner, exceeded the predicted downturn and posted higher-than-expected growth in Q4. BMO Capital Markets’ chief economist, Doug Porter notes that the unexpected resilience of the U.S. economy is positively affecting certain Canadian sectors.

Inflation in Canada

With the assistance of rate hikes, inflation receded from a 40-year peak of 8.1% in June 2022 to 3.4% in December. However, the BoC doesn’t anticipate achieving the 2% target until 2025. The next rate announcement from BoC is due in March. Doug Porter observes this steady performance may enable policymakers to gradually counteract easing discussions while waiting for underlying inflation to decrease further.

The projected growth could impact forex trading, specifically influencing the Canadian Dollar’s performance against other currencies.

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