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Canada抯 2015 growth the slowest since 2009 recession

Wednesday, March 02, 2016 > 09:41:29
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(The Globe and Mail)

Canada’s oil-battered economy in 2015 grew at less than half the pace of 2014, Statistics Canada reported, as a return to sluggish growth in the fourth quarter punctuated a disappointing year.

Statscan said Tuesday that real (i.e. inflation-adjusted) gross domestic product rose just 1.2 per cent in the year, down from 2.5 per cent in 2014. That’s the slowest growth since the 2009 recession, as slumping prices for oil and other commodities took a big bite out of national income, business investment and domestic demand.

The year began with an oil shock and two consecutive quarters of economic contraction, and ended only marginally better. Real GDP grew at an annualized rate of 0.8 per cent in the fourth quarter, down from 2.4 per cent in the third quarter, as another round of commodity price weakness, a sluggish U.S. market and global economic uncertainty put the brakes on the Canadian recovery.

The fourth-quarter result underlined the country’s continuing economic struggles, but it did manage to beat the pessimistic expectations of the financial markets and economists, many of whom believed the economy hadn’t grown at all in the final quarter of the year. That modestly good news contributed to a rally in the Canadian dollar, which rose to 74.54 cents (U.S.), its highest close in nearly three months.

The quarter benefited from increased government spending and an improved trade balance, although the latter reflected more a weakness in imports than any strengthening in exports, which also declined but at a slower pace.

“It wasn’t good, but against the low bar set by expectations, Canada’s economy managed to deliver at least a bit of a pleasant surprise,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a research note.

December’s real GDP grew 0.2 per cent month over month, slower than November’s 0.3-per-cent growth, but better than the 0.1 per cent predicted by economists. The month was helped by solid trade, manufacturing and wholesale figures, partly offset by a slump in retail sales and oil and gas production.

Economists noted that the key weakness for 2015 – business investment – continued to hold the economy back in the fourth quarter, down 6.5 per cent annualized. For the full year, business investment in fixed capital – buildings, machinery and equipment, key building blocks for economic expansion – contracted 4.8 per cent, subtracting one full percentage point from real GDP.

Meanwhile, household consumption grew a modest 1.9 per cent in the year, including just 1 per cent annualized in the fourth quarter, the slowest since the first quarter of the year.

“That drop-off is partly due to the loss of commodity-related jobs and also a side effect of the much weaker Canadian dollar, which is driving up the price of imported goods and offsetting any benefit to households from lower gasoline prices,” said Paul Ashworth, chief North America economist at Capital Economics.

“The pain appears to be spreading,” he said.

Some of the starkest evidence of the impact of the oil shock on Canada’s overall economy was found in two key numbers: gross domestic income and nominal gross domestic product. Both reflect the dramatic deterioration in Canada’s terms of trade – the difference between the prices Canada receives for its exports, which were battered by slumping energy and other commodities, and the prices it pays for its imports, which were inflated by the plunge in the Canadian dollar.

Gross domestic income, the measure of all profits, wages and taxes generated by the economy, slumped 1.1 per cent for the year, including a 1.1-per-cent annualized decline in the fourth quarter. Nominal GDP, which measures GDP including price effects, grew a thin 0.6 per cent for the year, including just a 0.4-per-cent annualized pace in the fourth quarter.

Nominal GDP is the critical indicator of government tax revenue. In its recent update of its fiscal projections, the federal government cited weakening nominal GDP as the key reason for substantial increases in its budget deficit estimates.

Experts don’t expect the economy to pick up a lot this year. The average economist’s estimate for real GDP growth is about 1.4 per cent, while nominal GDP is seen picking up to a still-tepid 2.4 per cent.

“The economic climate undoubtedly creates a challenging environment for fiscal planning,” economists at Toronto-Dominion Bank said in a research report. TD predicted that the upcoming March 22 federal budget will show a $30-billion deficit for 2016-17, a shortfall that it doesn’t expect to change much over the next five years, based on the bank’s pessimistic outlook for nominal GDP growth.

Economists noted that the fourth quarter was better than the Bank of Canada’s most recent estimate of zero growth for the quarter, contained in its quarterly monetary policy report in January. However, they doubt the result will alter the central bank’s next decision on interest rates on March 9. Observers widely expect the bank to hold its key rate steady at 0.5 per cent, and see little chance of a rate change this year.


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