Canadian economy outperformed expectations in final 3 months of 2016

OTTAWA -- The economy closed out last year with unexpectedly strong growth at an annual rate of 2.6 per cent, fresh numbers from Statistics Canada showed Thursday.

Credit the Canadian wallet, which is apparently a little thicker.

The biggest contribution to the fourth-quarter increase in real gross domestic product came from household spending, which also climbed 2.6 per cent, the agency said.

"It's really Canadians themselves that are driving growth," said Avery Shenfeld, chief economist for CIBC Capital Markets.

He noted the rise in household spending was connected to another fourth-quarter data point that snuck up on economists: a surge in employee compensation.

That increase appears to contrast with recent labour figures from Statistics Canada that have shown weaker growth in wages and hours worked for Canadians, Shenfeld said.

Analysts also said GDP growth was driven by contributions from quarterly increases in spending on housing and by government, which was perhaps a sign that Ottawa's infrastructure program has started to kick in.

But while households carried the bulk of the load, business investment continued to disappoint.

The downward pressures on growth were led by an 8.2 per cent decline in business investment, the category's ninth consecutive quarterly contraction.

"It was a bit of a messy quarter with some big pluses and minuses, but overall still better than expected," Shenfeld said.

The overall quarterly GDP figure also received a lift from a sharp quarterly drop in imports, which fell at an annual rate of 13.5 per cent. Statistics Canada said some of the decline was due to the one-time, third-quarter import of a large module for the Hebron offshore oil project in Newfoundland.

The last time Statistics Canada saw such a significant drop was the first quarter of 2009, when the headline import figures dropped at an annual rate of 33.3 per cent.

Heading into Thursday's release, a consensus of economists had predicted economic growth in the fourth quarter would expand by two per cent, according to Thomson Reuters. In January, the Bank of Canada forecasted real GDP growth of 1.5 per cent for the fourth quarter.

The Canadian economy grew faster in the fourth quarter of 2016 than that of the U.S., which expanded by an annual rate of 1.9 per cent.

Canada's solid late-2016 performance even led to an upward revision to third-quarter real GDP, which was bumped up to 3.8 per cent from 3.5 per cent.

Overall, the economy expanded by 1.4 per cent in 2016, higher than the 0.9 per cent growth the previous year.

The real GDP figures were released as the Bank of Canada and the federal government try to gauge the direction of U.S. economic policy under President Donald Trump. Concern has spread through Corporate Canada and Ottawa over the effects of possible changes to taxation and trade policies by Trump's administration.

The Bank of Canada held its trendsetting interest rate steady on Wednesday and warned that it's closely monitoring "significant uncertainties" weighing on the economic outlook.

But for now, at least, economists said Canada's numbers are encouraging.

"Just one day after the Bank of Canada delivered a relatively sombre view on the Canadian economy, the evidence continues to mount that the growth landscape is shifting for the better," BMO chief economist Doug Porter wrote Thursday in a research note to clients.