Statistics Canada released its numbers for the Canadian economy in the fourth quarter of 2018, and it wasn’t pretty. Fourth quarter gross domestic product (GDP) growth came in at an abysmal 0.4%. Far lower than projections of 0.08% and 1.2%. And much worse than the 2.0% GDP growth reported in the third quarter of 2018. GDP growth for the first quarter of 2019 is expected to be as weak. This will have a material impact on Canadian stocks, the loonie, and what the Bank of Canada does with interest rates.
Canada’s 4th Quarter GDP Tumbled in 2018
The Canadian economy came to a screeching halt in the last quarter of 2018, expanding at just 0.1% in the fourth quarter, for an annualized pace of 0.4%. That’s the worst quarterly GDP growth in more than two years. That’s also a sharp drop from the annualized two percent gain in the third quarter.1
For 2018, Canada’s GDP advanced just 1.8%, far lower than the 3% expansion in 2017. The U.S. economy meanwhile expanded by 2.6% in the fourth quarter.
The Canadian economy actually shrank by 0.1% in December. It was the second consecutive month that GDP contracted and the third slide in four months. Consumer spending advanced at its slowest pace in almost four years, business investment dropped for a second straight quarter, and housing fell the most in a decade.
The only thing that kept the Canadian economy from the start of a recession was a build-up in inventories as businesses stockpiled goods.
An economic slowdown was expected in the fourth quarter, thanks to falling oil prices, but the economic picture painted by Ottawa is pretty bleak, with weakness spreading well beyond the energy sector.
On the plus side, wholesale and retail trade, transportation and warehousing, along with the finance and insurance sectors expanded in December. But major economic drivers like mining and oil and gas exploration, utilities, construction, and manufacturing experienced major slowdowns.
Manufacturing contracted by 0.7%, its fourth contraction in five months. Construction pulled back for a seventh consecutive month; this is the first time that has happened in almost 30 years.
That may not be a total surprise. Housing data has fallen ever since interest rates have been on the rise and Ottawa introduced a large number of stricter mortgage lending rules.
The outlook for the Canadian economy isn’t exactly rosy, with Statistics Canada revising its outlook for the first half of 2019 lower.
What does this data mean for Canadian investors? The loonie took a hit and an economic slowdown could stall growth on the TSX. The weak GDP numbers and outlook could also force the Bank of Canada to hold off raising interest rates. At least for a while.
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1. “Gross domestic product, income and expenditure, fourth quarter 2018”, Statistics Canada, March 1, 2019; https://www150.statcan.gc.ca/n1/daily-quotidien/190301/dq190301a-eng.htm
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