3-2-18 12:19 PM EST | Email Article
By Kim Mackrael 

OTTAWA -- Canada's gross domestic product expanded at a slower pace than expected in the fourth quarter, marking a disappointing end to a strong year and adding to worries that the economy faces stiff headwinds from U.S. trade and tax policy.

The GDP report reinforced a growing view that the Bank of Canada will keep interest rates on hold in its policy announcement next week.

Canada's GDP, the broadest measure of goods and services produced in an economy, rose at a 1.7% annualized rate in the quarter, to $1.87 trillion Canadian dollars ($1.46 trillion), Statistics Canada said Friday. Third-quarter growth was revised downward to 1.5%, from an earlier 1.7% estimate.

Market expectations were for a 2% advance in the fourth quarter, according to economists at Royal Bank of Canada. The Bank of Canada had earlier forecast a 2.5% gain.

In comparison, the U.S. economy advanced 2.5% in the final three months of 2017.

The data come as the Canadian economy faces growing pressure from the U.S., which is its biggest trading partner. The uncertain future of the North American Free Trade Agreement and possible new tariffs on imported steel and aluminum, which were announced this week, are fueling concern about the country's trade outlook.

At the same time, recent cuts to U.S. corporate tax rates have stoked fears that Canada will be less attractive for business investment compared with its neighbor to the south.

A Statistics Canada survey released earlier this week indicated business investment is expected to slow in 2018 compared with last year, while current-account data said foreign investment in Canada hit a seven-year low in 2017.

Bank of Nova Scotia economist Derek Holt said worries over trade with the U.S. could threaten the Bank of Canada's expectation that more growth will come from exports and investments, as household spending slows.

"Given linkages between trade policy uncertainty and investment, I would think the [Bank of Canada] has more reason for concern," he said.

Canada had stronger growth during the first half of the year. The economy grew 3% in 2017, matching Bank of Canada expectations and well above the 1.4% expansion recorded in the previous year.

Several economists said Friday that they don't expect the Bank of Canada to raise interest rates next week.

The Bank of Canada raised its benchmark interest rate three times during the past year, to 1.25%, and indicated in January that it expects the economic outlook to warrant further increases. However, it also said it would take a cautious approach on rates given uncertainty over the future of Nafta and the impact of new mortgage-financing rules.

The fourth-quarter report indicated that business investment was the top contributor to growth, rising 2.3% on a nonannualized basis. Investment in residential housing advanced 3.2%, following a flat third quarter. Ownership transfer costs rose 9.3% in the quarter, indicating a bump in resale activity before new mortgage-financing rules came into effect at the beginning of 2018.

Household spending rose 0.5%, compared with a 0.9% gain in the previous three-month period.

Exports of goods and services rose 0.7% in the quarter, after recording a 2.7% decline in the previous period. Imports advanced 1.5%, up from 0.1% in the previous quarter.

In calculating Canada's GDP, Statistics Canada deducts imports to arrive at a level of domestic production. That means the fourth-quarter increase in imports was a drag on GDP.

Businesses accumulated C$13.81 billion in inventories in the fourth quarter, with manufacturers, retailers and wholesalers adding to their stocks.

On a month-over-month basis, GDP rose 0.1% in December, matching market expectations. November's GDP advanced 0.4% from the previous month.

December's growth was driven by strength in the housing sector, and gains in business investment and public-sector spending. That outweighed declines in wholesale and retail trade.

Write to Kim Mackrael at kim.mackrael@wsj.com


(END) Dow Jones Newswires

March 02, 2018 12:19 ET (17:19 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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