Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Growth in the fourth quarter was much weaker than expected, showing that growth stalled in the last quester of 2002. However, the details show that most of the weakness was the result of a decline in inventories. After a contraction in the third quarter, a rebound in domestic demand suggests some resilience in the domestic economy despite the significant increase in interest rates and the reduction in household purchasing power over the past year.
Disposable income improved in the fourth quarter due to increased government transfers. As a result, once adjusted for inflation, real disposable income increased, improving the purchasing power. The saving rate increased, suggesting that households remain cautious with their spending. With inflation remaining high and interest rates having increased significantly, households continue to face continued pressures on their purchasing power and finances.
We expect economic activity to remain weak in the first half of 2023 as the sharp increases in interest rates continue to take their toll on economic activity, especially residential investment and consumer spending. The strength in consumer spending will depend on households’ willingness to spend the money saved during the pandemic.
Today’s GDP number does not change our view that the BoC will keep its policy rate unchanged at the March meeting. While growth was weaker than expected, it will be a welcomed outcome for the central bank, as it indicates that some slack in the economy is being created without the need for a contraction in economic activity.
The Canadian economy was flat at 0.0% q-o-q annual rate (ar) in the fourth quarter of 2022 (+3.9% y-o-y), much weaker than expected. This followed an increase of 2.3% q-o-q ar. in the third quarter of 2022. Two years after the start of the pandemic, economic activity stands 2.9% above its pre-pandemic level.
In terms of details, an increase in household spending (contributing 1.1 percentage points (pp) to growth), government spending (contributing 0.9pp to growth), and an improvement in net trade (contributing 4.7pp to growth) were fully offset by a reduction in inventories (reducing growth by 5.6pp to growth), a decline in both residential investment (reducing growth by 0.7pp) and business investment (subtracting 0.5pp to growth). Final domestic demand rebounded in 4Q after a contraction in 3Q, contributing 1.0pp to growth.
Household spending rose by 1.1% q-o-q ar, contributing 1.1pp to growth by. This followed a small decline of 0.2% q-o-q ar. in the third quarter of 2022. The rebound in consumer spending was the result of a bounce back in spending on goods (+3.0% q-o-q ar.), while spending on services remained robust (+1.3% q-o-q ar.). The increase in spending on goods was mainly in durable goods, as a gradual easing in supply chain issues, especially in motor vehicles, allowed manufacturers to meet demand.
Residential investment dropped by 8.8% q-o-q ar., subtracting 0.7pp to growth. The reduction in activity in the sector was broad-based with contractions in new construction, renovation activity and ownership transfer costs.
Business investment contracted by 5.5% q-o-q ar. on the quarter, reducing growth by 0.5pp to growth. The details show a second consecutive decline in investment in machinery and equipment, mainly due to a reduction in investment in computer and peripheral, industrial machinery, and aircraft and other transportation equipment. Non-residential structures increased. Investment in non-residential structures increased 10.2% q-o-q ar., contributing 0.5pp to growth as a result of an increase in engineering structures as spending at the Kitimat LNG project.
The external sector was the main source of growth, adding 4.7pp to growth. Exports of goods and services increased a meagre 0.9% q-o-q ar. in Q4, contributing 0.3pp to growth, led by exports of wheat, canola and travel services. Imports fell by 12.0% q-o-q ar., reducing growth by 4.4pp to growth. The decline in the fourth quarter was led by pharmaceutical and medicinal products, computers and computer peripherals, and electronic and electrical parts.
Canada’s terms-of-trade deteriorated in Q4 (-3.2% q-o-q) mainly as a result of a decline in commodity prices and other goods. Nevertheless, the terms-of-trade remains elevated.
On the income side, household disposable income rose by 3.0% q-o-q. The higher disposable income was mainly due to an increase in government benefits, namely a one-time Goods and Services Tax credit top-up and a 10.0% increase in Old Age Security payments for seniors aged 75 years and over.
With disposable income increasing faster than consumer spending, the household saving rate increased to 6.0% from 5.0%, still well above its pre-pandemic level.
The monthly GDP for December eased by 0.1% m-o-m (+2.3% y-o-y). The preliminary estimate for January suggests that activity was likely rebounded +0.3% m-o-m.
The goods-producing sector declined 0.6% m-o-m (+2.3% y-o-y). The contraction was mainly due a drop in activity in the mining, oil and gas sector (-4.0% m-o-m) as a result of unplanned maintenance and disruptions caused by the Keystone pipeline spill in Kansas. An increase in manufacturing, construction and utilities partly offset those increases.
The service sector was flat on the month (+2.3% y-o-y). The performance of the sector was mixed. Declines in wholesale trade, transportation and warehousing, and finance and insurance were offset by gains in public administration, retail trade, 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 drop in the activity level increased on the month in oil and gas extraction and support activities, and pipeline transportation suggest that economic activity in the province likely declined in December.
Independent Opinion
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