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Canada's economy is barely growing, putting stimulus on the table


Canada’s economy grew at a sluggish 0.4 per cent annualized in the fourth quarter of 2018, bringing the final tally for annual growth last year to 1.8 per cent.

For the sake of comparison — the economy grew 3 per cent in 2017, according to Statistics Canada.

“There really isn’t much good to say about this report, with a variety of disappointments, in both the headline and the details,” said Doug Porter, Chief Economist at Bank of Montreal, in a research note.

The details Porter is referring to include final sales falling 1.3 per cent, a double-digit drop in business investment, and a big dip in residential activity.

“Construction was also weak again, falling 0.9 per cent, and now down a wicked 6.3 per cent y/y (by far the weakest major sector),” said Porter.

Porter doesn’t expect a quick turnaround — keeping the Bank of Canada on the sidelines until late this year at the earliest.

“With oil production cuts now about to land on the early-2019 results, we can’t look for a quick turn in overall growth,” said Porter.

“Instead, we’ll have to wait for spring for the economy to pull out of its lengthy hibernation in Q4 and Q1.”

Karl Schamotta, Chief Market Strategist, at Cambridge Global Payments is also underwhelmed by the report.

“Growth in the Canadian economy slowed dramatically last quarter as business investment and household spending fell – sharply lowering the likelihood of another rate increase from the Bank of Canada in the coming months,” said Schamotta in a research note.

Schamotta says the data are even worse than expected — hurting the loonie.

“Most observers expected a slowdown, but with consensus expectations set well above these levels, currency markets are reacting badly,” said Schamotta.

“The release, (which appeared almost fifteen minutes earlier than intended on the Statistics Canada website) sent the Canadian dollar careening downward, and the exchange rate remains a full cent weaker as we go to print.”

Today’s poor performance may even have an impact on the upcoming federal budget. Derek Holt, Vice-President & Head of Capital Markets Economics at Scotiabank, says it could give Ottawa ammunition to add stimulus in the March 19 budget.

“I wouldn’t be surprised to see the emphasis upon quick shots that get stimulus immediately out the door, like more cash infusions for households as one option,” said Holt.

“It might also raise pressure on Finance and the provinces to ease restrictions on housing demand which Finance Minister Morneau has already hinted will be a focus in the upcoming budget.”

Holt says we shouldn’t panic because a rebound is in the cards with oil prices rising, NAFTA uncertainty behind us, and housing markets stabilizing against the backdrop of strong jobs growth.

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