Economy seen growing 6.3%, beating Bank of Canada forecast

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Canada’s economy grew more than expected in November to bring real gross domestic product above its pre-pandemic levels, but the Omicron variant could throw a wrench in those gains.

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Real GDP in November grew 0.6 per cent, beating Statistics Canada’s preliminary estimate of 0.3 per cent, the agency reported Tuesday.

The revision comes from a smaller than expected decline in the mining and oil sector as well as stronger growth in the agriculture, forestry, fishing and hunting sectors.

Statistics Canada’s preliminary estimate for December growth is flat as Omicron spread through the country, prompting restrictions in its wake.

“The economy appeared to have been in a bit of a sweet spot, with supply chain challenges easing and in-person activities continuing to rebound. However, after six straight monthly expansions, momentum hit a wall in December,” Royce Mendes, an economist at Desjardins, wrote in a note. “We expect that the economy contracted in January under the weight of Omicron.”

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Canada’s economy had been building momentum prior to the latest virus wave. Advance data suggest GDP posted a 1.6 per cent uptick in the final quarter of 2021.

That would mean on an annualized basis, GDP grew 6.3 per cent, slightly stronger than the Bank of Canada’s estimate of 5.8 per cent. During policy deliberations last month, the central bank determined that the economy had reached its limit of non-inflationary growth, which prompted it to drop its extraordinary forward guidance and pave the way for a series of rate hikes this year to deal with inflation that’s running at its fastest pace in three decades.

“While reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target,” Governor Tiff Macklem said in his opening statements on Jan. 26.

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Economists now expect Macklem to raise interest rates as soon as March but the central bank will have to contend with hiking at a time when most expect a first-quarter contraction because of Omicron restrictions.

Positive gains in 17 of 20 industries brought GDP 0.2 per cent above its February 2020 levels and both the goods-producing and service-producing industries were up 0.5 per cent and 0.6 per cent respectively.

Wholesale trade had its largest monthly gain since July 2020 and its fourth consecutive month of growth largely due to strong international demand for building materials and supplies.

Supply chain problems had less of an impact on the manufacturing sector in November. Manufacturing grew 1.4 per cent, with growth in both durable goods, like vehicles and transportation, and non-durable goods, such as petroleum and clothing and textiles.

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The mining and oil and gas sector was down for the first time in seven months, dropping 1.8 per cent in November. Oil and gas extraction decreased 2.5 per cent in November after hitting pre-pandemic levels of production in October. Floods in British Columbia hit coal mining, which dropped more than 17 per cent.

Data which reflect conditions before Omicron lockdowns, show the hotel and restaurant industry rising 3.4 per cent after two consecutive months of declines. Both entertainment and retail posted gains.

“The sturdy growth in the days just prior to the spread of Omicron show, yet again, how the Canadian economy can rebound forcefully when it is allowed to re-open,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note.

“While not far from the BoC’s latest estimate, it is a bit higher yet, and is simply another turn of the screw, all but ensuring a rate hike at their next meeting on March 2.”

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