Canada Economic Growth Stagnates as Firms Cut Stockpiles

Canada’s economic growth stagnated in the fourth quarter as gains in investment and consumer spending were blunted by companies scaling back inventories, suggesting there’s little momentum early this year.

Gross domestic product grew at a 0.6 percent annualized pace from October to December, the slowest since the second quarter of 2011, Statistics Canada said today from Ottawa. The quarter ended with a 0.2 percent decline in output in December, led by manufacturers and retailers.

The last major report before the Bank of Canada’s March 6 policy announcement fell short of Governor Mark Carney’s Jan. 23 projection of a 1 percent expansion rate. Signs that the world’s 11th largest economy is struggling to reach full output led Carney to say that an increase in his benchmark interest rate is “less imminent.”

“There really isn’t much driving Canadian economic growth right now,” said Robert Kavcic, a senior economist at the Bank of Montreal in Toronto. “We are still looking for pretty sluggish growth, sub 2 percent for the first quarter.”

The Canadian dollar erased an earlier loss after the report, trading for 1.0269 per U.S. dollar at 4:21 p.m. in Toronto. Earlier it touched C$1.0342, its weakest since June. Canadian government bond yields declined, with the 10-year security falling as far as 1.79 percent -- its lowest this year -- from 1.84 percent yesterday.

Household consumption led economic growth in the fourth quarter with a 2.7 percent annualized gain. That spending has benefited Cineplex Inc., Canada’s largest movie theater operator, whose shares have surged to all-time highs after posting record sales and attendance in 2012.

Demand Rotation

Investment and exports both rebounded in the fourth quarter after dragging down growth in the prior three months. Capital spending by companies rose 2.4 percent at annual rates to reverse a decline of 0.8 percent in the third quarter, while exports rose 1.2 percent following a 7.3 percent drop. Imports fell 1 percent, the first decline in more than a year.

“There is a lot of transitory weakness” said Ian Pollick, senior rates strategist at Royal Bank of Canada in Toronto. The Bank of Canada next week will cut its growth forecast and may further dilute its signals about raising interest rates, he said.

Carney said Feb. 25 the “rotation” of demand from the country’s indebted households to businesses “is the fundamental challenge” for Canada’s economy.

Output Figures

Business spending on inventories was the only major category to show a decline in the fourth quarter, falling by C$10.3 billion ($10.0 billion) at annual rates, Statistics Canada said.

The fourth quarter and December output figures both matched the median estimates in Bloomberg surveys.

Carney, who leaves June 1 to head the Bank of England a month later, will probably keep his policy rate at 1 percent next week and through the rest of his tenure, according to an economist survey. The benchmark rate has been unchanged since September 2010, the longest period since the 1950s.

“In the very near term, more of the elements of the downside risks have materialized,” Carney said at a Feb. 25 press conference following a speech at the Richard Ivey Business School at Western University. “Inflation is pretty much tracking in line with expectations at this stage so I don’t want to overemphasize shorter-term data.”

Budget Goals

Canada’s consumer-price index rose 0.5 percent in January from a year earlier, the slowest pace since October 2009, Statistics Canada said Feb. 22. The central bank sets interest rates to meet a 2 percent inflation target.

Finance Minister Jim Flaherty said today’s report means he may have to cut spending further to reach a goal of eliminating a budget deficit before the next federal election due in 2015.

“We start from the premise that we’d like to balance the budget in 2015, and it may need some more sacrifice in budgeting among the various ministries of the government,” Flaherty told reporters. “We will stay on track for a balanced budget in the medium term, which is the current parliamentary term, which means 2015.”

The pace of growth in December from 12 months earlier, 0.8 percent, was the least in three years. The full-year growth rate of 1.6 percent slowed from 2.6 percent in 2011.

“Today’s report caps a disappointing year for the Canadian economy,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto. “Business investment and net exports need to be in the driver’s seat” this year, he said. “This is largely contingent on how events abroad unfold. Unfortunately the global backdrop appears to be struggling.”

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