Canada’s Growth: Not Yet a Win?
It has been quite a few days for Canada – a well hosted (if costly) Olympics with a record number of gold medals including a coveted hockey gold. Now it seems, like the U.S., Canada’s economy bounced back strongly in Q4, growing 5.0% q/q annualized, up from under 1% in Q3 (itself revised up). Net exports again returned to growth (as autos and energy exports picked up and imports fell) and domestic demand climbed by 4.6%. However, as with the U.S. , this return to growth could fade. There are a few warning signs ahead.
The revival in domestic demand seems to still be too tied to the bounce in the housing sector as residential investment climbed strongly and related durable goods like furniture benefited from the housing boom. Consumption continued to climb modestly. Canadians are still trying to lock in near-record low mortgage rates particularly as some new regulations are coming into effect. As credit becomes a little less available and housing prices rise, sales should slow. Moreover, the expiry of home renovation tax credits likely pushed forward some demand in 2009 from 2010.
More reason for concern, the private sector seems to be suffering a relapse. Business investment slumped almost 9% q/q annualized, more than reversing the growth seen in Q3. Companies reduced expenditure on office space, on machinery and equipment – these are not yet the signs of strong private demand.
Given that Canada seems to have some sectors at risk of overheating and others that are barely out of recession, Canada’s fiscal and monetary exit will be critical. Tomorrow (March 2 will thus be an important day. The Bank of Canada will meet, likely reiterating their pledge to maintain interest rates and the government will release their budget plan. Fiscal policy is at present set to become a drag later in 2010 and many provincial governments have been cutting spending for some time. Yet, with the risk that Canada may be facing a structural not just cyclical fiscal deficit, spending cuts will be on the way… just maybe not in 2010.
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