John Woods
The economy is rocketing further away from recession, increasing the chances that the Bank of Canada will lift borrowing costs more aggressively than expected later this year.
Economic growth surged 5 per cent annualized in the fourth quarter, providing the clearest sign yet that a broad-based recovery is taking firm hold. It was the fastest annualized quarterly growth since 2000, and the first solidly positive quarter since the economy entered recession in 2008 amid a global pullback brought on by the financial crisis.
The fourth-quarter surge was fuelled by everything from a strong housing sector and healthy consumer spending to a surprise turnaround for net trade as the country's exports grew at almost double the pace of imports, according to Statistics Canada.
The unexpectedly strong growth blew past the Bank of Canada's estimate by almost two percentage points and could lead to interest rate hikes sooner or on a greater scale than expected later this year.
In such areas as housing, jobs, deficits and stimulus, how does Canada measure up? Our graphic explains
Central-bank chief Mark Carney will almost certainly leave his main interest rate at a record low 0.25 per cent Tuesday when he releases policy makers' latest decision at 9 a.m. in Ottawa, having pledged to remain on hold through June barring a fundamental shift in the outlook for inflation.
But coming on the heels of a report last week that showed the central bank's preferred inflation gauge was just shy of its 2-per-cent target in January, the growth numbers have intensified discussion over how Mr. Carney will tighten.
In light of the hotter-than-expected economic data, Mr. Carney could undertake a series of rate hikes over several decisions starting in July, or he could raise rates more steeply than the typical 25-basis-point increments. He could even make a move before July.
"Our forecast is still that they hike the minute the conditional commitment is off, but I feel they have a strong case for going in the second quarter, no matter how you slice it," said Derek Holt, an economist at Scotia Capital in Toronto.
There's an increased likelihood the central bank will raise rates at both of its first two rate decisions in the second half of the year, said Doug Porter, an economist with BMO Nesbitt Burns in Toronto. Mr. Porter said while he's still predicting the central bank will move in instalments of no more than 0.25 per cent, the combination of the growth report and the January inflation numbers boost "the risk that the Bank might be more aggressive."
That could eventually help cool the housing sector. "If the market begins to expect a more aggressive campaign by the Bank of Canada it would drive up longer-term mortgage rates," he said.
Currently, the economy is picking up steam in a variety of areas.
The red-hot housing industry is benefiting from low interest rates that helped the resale market soar to a 72 per cent gain in December from a year earlier. Spending by governments and consumers is also powering growth. The goods-producing side of the economy had its first gain in more than two years, and exports went from being a net drag on the economy to a positive. The only key area to see a drop was some investment by businesses.
And, unlike in the U.S., where the biggest contributor to growth is coming from inventory restocking, inventories at Canadian businesses are falling at an accelerating pace.
At the same time, persistent slack in the economy - as evidenced by the country's unemployment rate above 8 per cent and low capacity use by factories - suggests the current pace of growth may not be sustainable, particularly as government stimulus spending fades later this year.
In addition, the net contribution from trade may be an anomaly, since demand in Canada's most crucial market, the U.S., remains shaky.
"There's still enough question marks over the U.S. economy that exports aren't completely out of the woods," Mr. Porter said.
For now, home-improvement chain Lowe's Canada is confident enough in the recovery that it's hiring people and adding eight to 10 new stores in Canada in the next year, on top of the 16 stores it now runs, and says that pace will continue over the next few years. Each new store will hire 150 new workers.
"Canada's recession didn't last nearly as long as the U.S. and wasn't nearly as deep," Alan Huggins, president of Lowe's Canada, said in an interview. "We were a benefactor of that, and it's now manifesting itself in a strong real-estate market. Fundamentally, the market is sound and the economy is sound and we're able to take advantage of that."
But some businesses aren't as convinced the recovery is firmly entrenched.
"We have a cautious outlook as people have not been shipping as much, and not been buying as much," said Ajay Virmani, who runs Cargojet Income Fund, Canada's largest cargo airline. "The confidence level in the economy is cautious and a lot of companies are uncertain about their future."
Mr. Virmani's business - which ships everything from live horses to seafood to courier packages - perked up in the fourth quarter, though subsided in the start of this year.
As the effects of monetary and federal government stimulus ebb, Mr. Virmani is he's concerned the private sector isn't yet ready to hold the baton, so he doesn't expect a recovery to pre-recession levels for another two or three years, and his company still has a hiring freeze.
"We'll all have to tighten our belts and get used to a lower standard of living and lower expectations," he said. "Quite honestly, I don't think we've seen the worst."
Indeed, Prime Minister Stephen Harper took cautious comfort from the GDP report, telling reporters in Vancouver Monday that while the numbers are "encouraging," he doesn't think the government's mantra about a slow and gradual recovery is changed "based on one month's figures."
With a file from reporter
Ian Bailey in Vancouver