Canada economy tops Q4 expectations, central bank seen staying cautious

Canada's economy grew at a faster pace than anticipated in the final quarter of 2016, lifted by consumer spending and a drop in imports, though the strong figures were seen as unlikely to prod the central bank to soon modify interest rates.
Gross domestic product grew at an annualised 2.6 percent rate in the fourth quarter, Statistics Canada said on Thursday, beating economists' forecasts for 2.0 percent. While that marked a slowdown from an upwardly revised 3.8 percent rate in the third quarter, the economy grew by 0.3 percent in December, boding well for the transition into 2017.
An increase in net trade contributed to the fourth quarter's performance. Although exports rose just 1.3 percent on an annualised basis, imports slumped, giving back third-quarter gains due to one-time factors related to an East Coast oil project. Household consumption also drove growth in the fourth quarter, climbing 2.6 percent as consumers continued to spend.
While fourth-quarter growth surpassed the Bank of Canada's 1.5 percent forecast, economists said it was unlikely to alter the central bank's cautious stance after it downplayed recent positive data in its policy statement on Wednesday. In its communique, the bank said it left its benchmark interest rate unchanged at 0.50 percent.
"The Bank of Canada is worried about a number of uncertain factors, especially what happens with economic policy in the US," said Jimmy Jean, senior economist at Desjardins. "I think they will keep, all things considered, a very prudent approach," he added. The Canadian dollar strengthened against the greenback immediately following the report. Still, the strong quarterly figures could "slightly shade" the bank's economic view, said Doug Porter, chief economist at BMO Capital Markets.
"We believe that their messaging will gradually change as we go through this year, as the evidence that the Canadian economy is taking a turn for the better becomes overwhelming," he said. A rebound in housing investment also supported growth after declining in the previous two quarters. Consumer spending and the housing market have been key pillars of the economy in recent years, spurring concerns Canadians are taking on too much debt.
But the household savings rate rose to 5.8 percent as disposable income outpaced spending. There were also signs that government investment may be kicking in as a stimulus to growth. The ruling Liberal Party made reinvigorating the economy a major part of its successful 2015 election campaign. The government has allocated billions to infrastructure spending.