Statistics Canada reported today that GDP grew 0.6 percent in January, well above the consensus expectation of a 0.3 percent gain*. The good news on overall economic activity follows recent positive data on external trade, retail sales and employment, Many economists are rushing to upgrade their expectations for the whole of Q1, with an annualized growth rate above 3 percent now almost inevitable.
Manufacturing posted the strongest growth, with a 1.9 percent monthly increase, but strength was evident in most parts of the economy. The economy has now grown in each month bar one (October) since last June. Although expansion in the third quarter of last year was largely attributable to the bounce-back from the Fort McMurray wildfire disaster, it appears that the economy has now developed a broader-based momentum of a kind not seen not seen for several years.
This is Canada, so we have to ask: what can go wrong? The first and most obvious risk is the situation south of the border. The Trump administration is starting to set out its stall for the promised renegotiation of the NAFTA agreement, and has also announced its intention to investigate the "trade practices" of Canada and a number of other countries. Even before any of this leads to actual policy changes, there is a risk that fear of trade restrictions might cast a chill on business sentiment in Canada.
Closer to home, the biggest risk remains the housing market. Prices in the Toronto area rose 27 percent in 2016 and a similar increase is foreseen for this year, barring some steps by the authorities to cool the market. There is no possibility that the Bank of Canada will be raising rates any time soon, but Provincial and municipal politicians are making noises about taking steps to slow things down. British Columbia had reasonable success last year with its tax on foreign purchasers, and the Ontario budget (likely on April 27) may well try something similar. Given the customary ineptitude of both Ontario and Toronto politicians, there's a clear risk that they could get this wrong, with potentially damaging consequences either immediately (if they do too much) or later (if they don't do enough).
Neither of these risks seems unduly severe in the near term. This being the last day of March, higher-than-expected growth for Q1 is already baked in, and the momentum is likely to persist at least through mid-year. Good news for policymakers, and vindication for Federal Finance Minister Bill Morneau's relatively cautious fiscal stance in his budget earlier this month.
* I can't pass over an obvious bit of economic illiteracy in the linked article. I don't think you'd need a PhD to figure that if the economy grew 0.6 percent in January, then the annualized growth rate has to be north of 7 percent -- and yet the reporter states it was 2.3 percent. Knowing the difference between "annualized" and "year over year" is apparently not a pre-requisite for an economics reporter at Canada's national broadcaster.
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