Flat February GDP masking Canada’s momentum

Canadian economic growth took a pause in February after the break-neck pace seen at the start the year.

Statistics Canada said Friday gross domestic product was unchanged in February, matching the expectations of economists, according to Thomson Reuters.

February followed three months of gains including stronger-than-expected growth in January.

“After the exciting growth figures of recent months, it was perhaps inevitable that the Canadian economy would take a slight breather,” TD Bank senior economist Brian DePratto wrote in a report. Despite the result, DePratto noted that momentum heading into the year remains consistent with a solid economic expansion.

Paul Ferley, assistant chief economist for RBC Capital Markets, points out there’s more to the story. In a release, he says, “February’s flat monthly reading belied an acceleration in the annual pace of growth, with real GDP output up 2.49% compared to a year earlier. This was the fastest pace of increase since July 2014, and reflects the recovery in the goods-producing sector.”

He also highlights mining production, which was boosted by the recovery in commodity prices, and growth in service-producing industries, which were “steadier over the last two years.” Ferley concludes, “This broad-based strengthening pumped the annual growth in overall GDP higher in February relative to January’s 2.29% pace.”

Statistics Canada said gains in service-producing industries were offset by declines in goods-producing industries for February.

Service-producing industries were up 0.2% for the month as the finance and insurance sector gained 0.7%. The real estate and rental and leasing sector added 0.5%. Meanwhile, goods-producing industries fell 0.3%, the first move lower since October.

The manufacturing sector fell 0.6% in February after growing in seven of the previous eight months, while the mining, quarrying, and oil and gas extraction group fell 0.2%.

CIBC economist Nick Exarhos said the biggest headwind in February was manufacturing, but noted weakness on the goods producing side was widespread, with only construction posting an increase.

“Despite what’s been an anemic pace to business investment, and still muted plans for 2017 on that front, housing starts have had a remarkable recent run,” Exarhos wrote in a report. “Residential investment is now poised to be a modest lift to GDP this year, from a drag we had forecast earlier on. That swing explains much of the upgrade to our overall 2017 GDP outlook.”

Matthieu Arseneau, senior economist at National Bank, says Canada is outpacing its peers. In a release, he says, “After struggling for some time, it’s encouraging to see the Canadian economy being the fastest-growing among G7 countries since the second half of 2016.”

He also says, “Even if GDP stagnated in February, it does not mean that economic growth in the quarter is at risk. Indeed, even if we assume a flat number again in March, GDP would have grown above 4.0% annualized thanks to a strong handoff and the surge in January (bottom chart). This is slightly above the 3.8% performance expected by the BoC in the April Monetary policy report.”