Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The economy was much stronger than initially thought in the second half of 2024, with growth at 2.6% q-o-q ar. in Q4 and growth in Q3 being revised significantly. Moreover, the dynamic in the monthly GDP, with strength in December and in the preliminary estimate for January, suggests that growth in the first quarter of 2025 could be around 2.0%.
The details show that growth was broad-based, but mainly driven by household spending and business investment, while inventories were the main drag.
Consumer spending showed notable strength in Q4, contributing 3.0pp to growth. Spending per capita increased on the quarter (+0.9% q-o-q), its strongest since 2022Q2. Moreover, with population growth slowing in Q4, we estimate that Q4 GDP would have grown only slightly slower (+2.4% q-o-q ar.) if population growth was the same as pre-pandemic. (see It’s a “Me-cession”, not a recession for details).
The increase in spending per capita can be traced to an improvement in households’ purchasing power in recent quarters. As such, disposable income rose by 1.1% q-o-q in Q4, and we estimate that real disposable income per capita increased by 0.4% q-o-q. and has clearly bottomed out. Nevertheless, while real disposable income per person is 2.2% above its pre-pandemic level, it is 5.4% below its pre-pandemic trend, explaining why households have felt poorer. The saving rate eased on the quarter, suggesting that households are becoming more willing to spend partly spurred by lower interest rates.
Today’s GDP shows that the Canadian economy was much stronger than expected at the end of 2024. It also shows a strong increase in spending per capita (+0.9% q-o-q) after stagnating for a year and a half. However, the uncertainty from the US tariffs will affect the economy in the coming months. There are indications that economic activity rose sharply in January as businesses stockpile on various goods ahead of the likely US tariffs. Conversely, the high uncertainty from the US tariffs is also likely to act as a headwind on the economy, as businesses and consumers delay spending and investment decisions (see US tariffs: A death by a thousand cuts).
In the absence of tariffs, the much stronger economy than initially expected, sticky inflationary pressures, and the recent strength in the labour market would support the Bank of Canada keeping its policy rate unchanged at the March meeting. However, a rate cut would be likely if the US imposed tariffs next week as announced.
Canadian economic activity rose by 2.6% q-o-q annual rate (ar) in the fourth quarter of 2024(+2.3% y-o-y), much stronger than expected. This followed an upwardly revised increase of 2.2% q-o-q ar. in the third quarter of 2024 (originally reported as +1.0% q-o-q ar.).
In terms of details, the growth was broad-based, with increases in household spending (contributing +3.0 percentage points (pp) to growth), business investment (adding 1.9pp to growth), government spending (contributing 0.6pp) and net exports (adding +0.6pp to growth) on the quarter. These increases were partly offset by a decline in inventories (subtracting 3.3pp to growth).
Final domestic demand surged in Q4, contributing 5.5pp to growth, after a robust 3.2pp in Q3.
Household spending increased 5.6% q-o-q ar, contributing 3.0pp to growth. This is the strongest increase in consumer spending since 2022Q2 during the pandemic and follows a strong 4.2% q-o-q ar. in Q3 of 2024. The strength in consumer spending was the result of higher spending on motor vehicles, financial services and telecommunication services.
Residential investment increased by 16.7% q-o-q ar., adding 1.2pp to growth. However, the higher activity was mostly driven by stronger and homeownership transfer costs (housing transactions), but activity in both new construction and renovation also contributed to growth in Q4.
Business investment on the quarter, added 0.6pp to growth. The details show a surge in machinery and equipment investment (+17.9% q-o-q ar., adding 0.5pp to growth) mainly due to increased purchases on industrial machinery, aircraft and other transportation equipment and parts in Q4. Investment in non-residential structures increased 2.7% q-o-q ar., adding a meagre 0.1pp to growth.
The external sector added 0.6pp to growth in Q4. Exports of goods and services rose 7.4% q-o-q ar. in Q4, contributing 2.3pp to growth. Exports of goods decreased by 12.1% q-o-q ar., while exports of services dropped 7.9% q-o-q ar. Higher exports of gold and other precious metals, crude oil and motor vehicles were the main reasons for the increase.
Imports increased 5.4% q-o-q ar., subtracting 1.8pp to growth. Higher imports of metal ores, pharmaceutical products, and other transportation equipment led to the rise in Q4.
Canada’s terms-of-trade improved slightly in Q4 (+0.1% q-o-q) mainly due a slightly stronger increase in Canadian energy product prices compared to import prices. Compared to its peak in 2022, the terms-of-trade declined by 11%, mainly due to a decline in commodity prices.
On the income side, household disposable income rose by 1.1% q-o-q. The higher disposable income was due to an increase in compensation of employees (+1.7% q-o-q). Real disposable income is estimated to have increased by 0.4% q-o-q in Q4. With a bigger increase in consumer spending than in disposable income, the household saving rate decreased to 6.1% from 7.3%, which remains higher than pre-pandemic.
Adjusted for population, real disposable income per capita rose by 0.4% q-o-q in Q4. Nevertheless, it is only 2.2% above its pre-pandemic level and about 5.4% below its pre-pandemic trend.
The monthly GDP for December rose 0.2% m-o-m (+2.2 % y-o-y), weaker than expected. Moreover, the preliminary estimate suggests that activity will rise 0.3% m-o-m in January.
The goods-producing sector increased 0.3% m-o-m (+0.4% y-o-y). Declines in agriculture, manufacturing and support activities for mining were partly offset by higher activity in construction and utilities.
The service sector increased 0.2% m-o-m (+2.9% y-o-y). Higher activity in retail trade, health care, recreation and entertainment, food services were the main sources of growth and were partly offset by weakness in wholesale trade, real estate, and professional, scientific and technical services.
For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The increase in oil and gas extraction and pipeline industry suggests that growth in the province likely overperformed the rest of the country.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.