Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The economy rebounded in the fourth quarter, increasing 1.2% q-o-q, and growth in the third quarter was revised higher. The details are not as positive as the headline suggests. Growth in Q4 is mainly coming from strong exports, a decline in imports and a rebound in consumer spending, while investment declined. As a result, final domestic demand contracted by 0.7% q-o-q on the quarter. With growth remaining weaker than population growth, GDP per capita continued to decline and is now about 3.2% lower than its recent peak.
Disposable income rose in the third quarter due to higher compensation of employees and net property income. However, once adjusted for inflation, real disposable income was much more modest, meaning little improvement in households’ purchasing power, with real disposable income remaining below its pre-pandemic trend. The saving rate barely changed on the quarter and remained above its pre-pandemic level, suggesting that households continue to be cautious with their spending.
With the preliminary estimate for January suggesting the economy expanded by 0.4% m-o-m, it seems likely that growth for the first quarter of 2024 will be relatively strong. Assuming no change in economic activity in February and March, growth in Q1 could be around 1.8% q-o-q ar.
However, as we have argued (see Will it be a hard landing or a soft landing? The labour market will decide), whether we see an underperformance in hiring or job losses will matter greatly for the outlook in 2024. Today’s GDP number does not change our view for the Bank of Canada. We continue to think that the BoC is unlikely to consider cutting its policy rate until it feels convinced that inflation will sustainably be below 3%. This would likely mean when the momentum (3m/3m annualized change) in its measure of core inflation has settled at or below 2.5%. With this in mind, we expect the BoC to start cutting its policy rate at the July meeting.
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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.