Statistics Canada will release real GDP numbers for 2017Q4 and December on Friday, ahead of the Bank of Canada decision next week. The moderate pace of economic growth observed in 2017Q3 likely continued in 2017Q4 (our call: 2.2% q/q saar, consensus: 2.0%). Our bottom-up model suggests a potential upside risk for the monthly real GDP figure for December (+0.3% m/m, consensus: +0.1% m/m).
In our view, the momentum of the Canadian economy observed at the end of last year was insufficient to convince BoC officials to hike for a second consecutive policy meeting on March 7th. First, real GDP growth in 2017Q4 was likely a notch below the BoC January Monetary Policy Report forecast of 2.5% q/q saar. Second, the underlying economic momentum is likely lower and closer to potential than the headline 2017Q4 real GDP growth figure will indicate. Particularly, several borrowers rushed to buy a residential unit before OSFI’s B20 stress test rule for uninsured mortgages became effective in January. The 8% q/q (36% annualized) temporary jump in resale transactions let to an oversized contribution of the housing sector to real GDP growth.
Also, further moderation in the pace of growth in consumer spending occurred during 2017Q4. The households’ saving rate was near a decade low in 2017Q3 (2.6%). Despite signs of acceleration in wage growth, the growing sensitivity of financially stretched households to higher interest rates has led to a softening in consumer goods expenditures.
Regarding the business sector, growth in non-residential investment likely accelerated in 2017Q4 since a majority of industries are running near or at full capacity. However, non-residential investment in Canada is too low relative to GDP at this stage of the cycle, most notably versus the U.S. benefitting from trade policy uncertainty, deregulation and immediate expensing on new capital investments. This unfavorable dynamic partly offset strong global demand for Canadian products. Thus, growth in Canadian exports remained soft in 2017Q4 and is unlikely to move in the fast lane anytime soon for a sustainable period.
Bottom Line: The respectable pace of economic growth registered in 2017Q4 occurred before many game changers took place in early 2018: OSFI’s B20 stress test weigh down resale transactions; Trump's tax reform became effective; the BoC increased its policy rate by another 25bps in mid-January; the minimum wage pass-through on CPI inflation coming from Ontario; and the return of volatility in financial markets in early February. Thus, we do not see how the GDP report could convince the BoC to increase its policy rate for a second consecutive time next week.