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posted on 07 April 2016

Canada's Rip-Roaring Growth

by Ari Charney, Investing Daily

Investing Daily Article of the Week

Handoffs can be just as important to economic growth as they are to Olympic relay races. And that appears to have been the case in Canada, as stronger-than-expected fourth-quarter growth helped the economy further accelerate during the initial leg of the first quarter.

On its face, fourth-quarter gross domestic product (GDP) growth might not have seemed much to get excited about. But economists had expected GDP to flat-line during the final quarter. Instead, it grew at an annualized pace of 0.8%, blowing away the consensus forecast.

This week, the January numbers were finally released, and Statistics Canada revealed that GDP grew 0.6% month over month, a pace nearly double what economists had predicted.

The sudden boom has economists furiously adjusting their models, with some now forecasting that first-quarter growth could come in at 2.5% to 3.0% annualized. That's significant because 2.5% is the minimum threshold at which the Bank of Canada says the country's economy is operating at full capacity.

And economists were uncharacteristically ebullient in their description of January's growth, employing verbiage such as "whopping," "rip-roaring" and "flying start."

The economy's performance during January was underpinned by growth in the manufacturing, retail, and resource sectors. And with the exception of wholesale trade, which declined by 0.2% during the month, all the other major contributors to GDP saw gains.

Manufacturing got a big lift from exports, which have benefitted from a lower Canadian dollar. The sector's output has grown for three consecutive months and is now up 2.6% year over year.

Although oil prices plumbed a new low during January, that didn't stop Canada's oil sands producers from pumping more. Non-conventional extraction helped boost the energy sector's output by 1.4% in January, for the fourth consecutive month of growth.

Meanwhile, the Canadian economy continues to enjoy significant support from the country's consumers, despite their record-high debt burden (or perhaps because of it). Retail trade climbed 1.4% month over month, for growth of 4.3% over the trailing year, making retail among the strongest sectors of the economy.

And as we reported last week, the newly elected Liberal government delivered on its campaign pledge to include stimulus spending in its first budget.

The first phase of the country's stimulus package came in at C$11.9 billion, an amount that some observers have criticized as too modest. In some respects, even Canada's Liberals are fiscal conservatives, at least compared to their more profligate peers in the U.S.

The government hopes that fiscal stimulus will boost GDP growth by half a point this year, which would be a significant gain, especially when considering that the forecast for full-year growth is just 1.4%. But check back in a month, and the consensus estimate may be decidedly rosier (those economic models take time to tweak).

Though it remains to be seen whether this trend will continue, economists believe the acceleration in growth won't be a fluke this time around, in part because unlike past blow-outs there were no special factors behind January's strong, broad-based performance. More please.

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