Ugly GDP Report Remains Good Enough for Poloz to Stand Pat

  • Canada quarterly growth of 0.8% tops estimates as imports fall
  • Business investment plunges 6.5% and exports also decline

It wasn’t pretty, but Canada’s economy registered an unexpected expansion in the fourth quarter, increasing the chances the central bank will keep its benchmark interest rate unchanged next week.

Gross domestic product rose at a 0.8 percent annualized pace between October and December, Statistics Canada said Tuesday in Ottawa. Economists polled by Bloomberg predicted GDP would be flat. The Bank of Canada’s January forecast also called for zero growth in the quarter.

Although growth beat expectations, the details suggest a weak recovery. The most significant contribution to the fourth-quarter expansion was an 8.9 percent drop in imports, the largest such decline since the first quarter of 2009. That was the result of the Canadian dollar depreciating 7.5 percent over the last 12 months, making foreign imports such as electronics more expensive.

The weaker currency failed to generate stronger exports, however. Shipments abroad fell 2.2 percent, the fourth decline in five quarters. If imports fall faster than exports, GDP expands. Business investment also shrank by 6.5 percent, the fourth straight drop.

The details of the report were “unambiguously bad,” David Tulk, chief Canada macro strategist at TD Securities in Toronto, wrote in a research note. The fourth-quarter result, and signs growth will exceed 1 percent from January to March “will cement the Bank on the sidelines at least through to the second half of the year,” he said.

Erik Hertzberg/Bloomberg

Bank of Canada Governor Stephen Poloz makes his next interest rate decision March 9. Expanding GDP, along with a promise of government spending from Finance Minister Bill Morneau, will probably keep the central bank on hold, at least for now, said John Clinkard, chief economist at Deutsche Bank Canada in Toronto.

“I don’t think they’re inclined to do anything,” Clinkard said by phone Tuesday.

Traders agree. Chances of a March 9 rate cut fell to 12 percent after the GDP report, from 15 percent last week and 30 percent at the end of January, according to Bloomberg calculations on overnight index swaps.

Canada’s dollar strengthened by 0.6 percent to C$1.3459 per U.S. dollar at 10:45 a.m. Toronto time.

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