Canadian National Accounts Data: Flash Report and Implications for Monetary Policy

The fourth-quarter performance was dominated by the expected response to the strong Canadian dollar. Net exports dragged growth downward, while the domestic economy, particularly personal expenditures, was a key source of strength. Unfortunately, from the economic growth perspective, one of the strongest components of personal expenditures was travel outside of Canada. Purchases of autos were also strong in the fourth quarter. On a more positive note, there was another buildup of inventory, following a buildup in the previous quarter, boding well for growth in the first half of 2008. In addition, there were extended holiday shutdowns in auto manufacturing, unlikely to be repeated going forward.

It was gratifying to note strength in the investment of machinery and equipment, so necessary for future productivity growth. Much of this investment is imported, stimulated by the strong Canadian dollar.

After reducing the policy rate in both December and January, the Bank of Canada has noted that "further monetary stimulus is likely to be required in the near term." There is some debate whether the Bank will reduce its policy rate by 25 basis points, as opposed to 50 basis points, at its next announcement date, which is tomorrow, March 4, 2008. Global Insight expects the Bank to go for only 25 tomorrow, to be followed by at least another 25 and perhaps 50 in the coming months. The Bank's reaction will depend largely on the expected action from the Fed, where the consensus seems to be moving from an additional 100 basis points to perhaps only 50. The Bank will keep its eye on the Canadian dollar, ensuring that a stronger dollar does not provide too much contraction to the economy.

This being the fourth-quarter report, the annual numbers for 2007 were completed. Economic growth last year came in at 2.7%, marginally above our expectation of 2.6%, due to slight upward revisions of earlier quarters. It was marginally below the 2006 pace of 2.8%, and equals the average of the past five years. Indeed, Canada's medium-term sustainable pace of economic growth is now about 2.8%, comprising about 1.6% labor productivity growth and 1.2% employment growth. Like the fourth quarter, 2007 overall was marked with the signs of adjustment to the stronger Canadian dollar. The major source of weakness was net trade, while the domestic economy, particularly construction, the energy sector, and personal spending were key sources of strength.

The early indications are that these fourth-quarter results will lead to a slight downward revision to Global Insight's current forecast for growth for 2008, which now is 1.9%. The full and final impact of this new National Accounts data on Global Insight’s March 2008 short-term forecast awaits a thorough analysis and running of our econometric model. We expect to complete the data bank for the March Canadian Short-Term Forecast and Analysis within a few days, and will provide our Preliminary Report at that time.

Clients and potential clients should note that we will be presenting a Teleconference call on March 11, at 11:00 A.M. (New York time). This event—"Can the Canadian Economy Survive the Turmoil in the United States?"—will provide our just updated Canada and U.S. March forecasts. As usual, we will provide an opportunity for questions and discussion. For details and to register, please see the Global Insight Web site.