Real Canadian GDP growth accelerates to a solid 3.3% in the fourth quarter

Bottom Line

* Fourth quarter real GDP growth accelerated to 3.3%, an impressive bounce back from (upwardly revised) growth of 1.8% in the third quarter. 

* Industry output advanced by 0.5% in September, and industrial production advanced by 1.1%.

* Growth picked up nicely and surpassed the revised 2.8% rate reported for the U.S. economy for the fourth quarter. 

* Growth in consumer spending motored ahead by 4.9%, up from 2.7% in the third quarter

* Business equipment investment decelerated to a growth rate of only 0.7%, down from 24.6% in the third quarter.

* Residential housing investment declined by 0.6%, the second quarterly decline in a row.

* Exports jumped by 17.1%, while imports increased by only 0.5% - trade made a huge positive contribution to growth.

* Inventories declined, reversing a large accumulation in the third quarter – the massive flip in inventory accumulation was a huge drag on overall output growth.

* The overall personal consumption deflator rose by about 2.0% annualized, a deceleration from 2.4% in the third quarter.

* Corporate profits jumped by 9.0% the quarter, a solid acceleration from flat in the third quarter. 

Outlook
The Canadian economy accelerated at a good rate in the fourth quarter. Overall growth accelerated from 1.8% (upwardly revised from 1.0%) in the third quarter to 3.3% in the fourth. Final domestic demand picked up from 3.7% in the third quarter to 4.7% in the fourth quarter.

In terms of the domestic economy, most of the acceleration in demand came from the consumer sector. Consumer spending accelerated from 2.7% in the third quarter to 4.9% in the fourth quarter. Government consumer spending accelerated, as well.

If there is one yellow flag in the report, business investment in machinery and equipment investment decelerated sharply – from a 24.6% gain in the third quarter to only 0.7% in the fourth. The mix of final domestic demand shifted from investment to consumption.

One clear positive, exports surged while imports barely crawled ahead. As a result, net exports added 6.4 percentage points to final demand in the fourth quarter – which surged by 11.1% - compared to subtracting 2.9 percentage points from final demand in the third quarter. That is a huge swing in the performance of net exports.

However, the surge in final demand led to a sharp drawdown in inventories, and the swing in inventories chopped the increase in gross domestic product by 7.8 percentage points to 3.3%.

Bottom line, excluding the noise from the wild quarterly jumps in net exports and inventories, there was a notable improvement in the pace of final domestic demand in the economy in the fourth quarter, but most of this improvement was driven by consumption and government spending. In addition, there were no signs of any pick up in domestic inflation measures. This points in the direction of solid non-inflationary growth.

Looking forward into 2011, we would expect consumer spending to moderate relative to the end of 2010 and converge to the range of 2.5% to 3.0%. Business investment in machinery and equipment should pick up, driven by solid growth in corporate profits. Exports should continue to make a positive contribution. Overall, the mix of real gross domestic product growth should improve in early 2011 and we expect real GDP growth to track just above 3.0% for the next several quarters.