The Canadian economy accelerated in Q4

Latest: +3.3% (actual); +3.0% (expected); previous: +1.8% (revised from +1.0%)

FACTS:
Real GDP in Canada increased 3.3% (annualized rate) in the fourth quarter of 2010 following an upwardly revised 1.8% increase in the third quarter. Real final domestic demand accelerated to 4.7% (A.R.) after recording a 3.7% advance the previous quarter. Personal consumption expenditures surged 4.9% (A.R.), strongly outpacing the 2.7% increase in Q3. Consumption of durable goods experienced a solid rise of 12.0% (A.R.), the largest quarterly increase since Q4 2009.

Gross fixed capital formation advanced 6.1% driven by non-residential investments (+10.4%). Residential investments decreased -0.6%, marking a third negative quarter in a row. Exports jumped 17.1% (A.R.), experiencing its largest advance since Q2 2004.

Imports edged up 0.5% (A.R.) after increasing 7.8% in Q3. Inventories were a drag on GDP, deducting 6.0 percentage points from growth in Q4. Corporate profits were up 9.0% (A.R.) after being virtually unchanged in Q3. The price of goods and services produced in Canada decelerated to 2.6% from 2.8% in Q3 (year over year).

OPINION:
The Canadian economy ended 2010 on a very strong note. Real GDP increased 3.3% in Q4, beating consensus estimate of 3.0% and above the Bank of Canada forecast of 2.3%. Domestic demand was very strong at 4.7%. International trade contributed 4.5 p.p. to growth while inventories shaved 6 p.p. Since Q3 was revised up from 1% to 1.8%, the level of GDP that we were forecasting with our 4% expected growth is right on target. Moreover, real gross domestic income increased a solid 5.4% in the last three months of the year, for a 4.1% growth on a twelve-month basis.

This morning’s report certainly reinforces our view that there is less capacity in the Canadian economy than what the BoC had previously stated. Domestic demand is now 3.3% above its pre-recession peak and real and nominal GDP are now in an expansion phase. Going forward, with the U.S. showing its best domestic demand growth in five years in 2011, we expect the Canadian economy to grow a decent 3% this year, as net exports and machinery and equipment investment should lead the way.