Canada's economy grew at faster-than-expected 2.6% rate in 4th quarter of 2016

The Canadian economy gained momentum in the fourth quarter of 2016 at a 2.6 per cent annualized rate, beating expectations.

Household spending boosts GDP growth, driven by financial services and durable goods such as appliances, cars

Canadian investment in residential structures increased 2.9 per cent in 2016. The economy gained momentum in the fourth quarter, according to Statistics Canada, beating expectations. (Jonathan Hayward/Canadian Press)

The Canadian economy gained momentum in the fourth quarter of 2016 at a 2.6 per cent annualized rate, beating expectations.

The new data released Thursday by Statistics Canada compares favourably to U.S. GDP growth during the same period, which was 1.9 per cent annualized.

Economists surveyed by Thompson Reuters had expected an annualized growth rate of two per cent for the quarter.

Household consumption was the single biggest driver of the GDP growth of 0.6 per cent in the final three months of last year, boosted by stronger spending on financial services and durable goods such as household appliances and vehicles. Investment in residential structures also rebounded.

Business investment declined 2.1 per cent during the quarter, the ninth quarterly contraction in a row.

Fourth-quarter growth was down from the revised 3.8 per cent annualized rate for the third quarter, which had been boosted by a resurgent energy industry after the 2016 fires in Fort McMurray, Alta.

"There are worse ways to end a year," wrote Brian DePratto, senior economist with TD Economics, in a note to clients.

"Canadians opened their wallets both at stores and construction offices, delivering a solid fourth-quarter economic performance. That said, the fly in the ointment continues to be business investment."

Other economists took a less rosy view of Statistics Canada's report.

"The gulf between top-line GDP growth of 2.6 per cent and final domestic demand growth of 0.4 per cent is a massive divide," wrote Scotiabank Economics vice-president Derek Holt in a client note.

"Recall that final domestic demand adds up consumer spending, government spending, residential investment and business investment. All totalled, these main engines of the domestic economy barely squeaked out any growth at all in Q4."

Annual GDP growth

Thursday's data shows GDP grew 1.4 per cent for last year as a whole, an improvement on the 0.9 per cent growth in 2015. The 2016 gain was skewed towards the first two quarters of the year, according to the national statistics agency.

Business investment in non-residential structures declines by 10.7 per cent for the second year in a row, which Statistics Canada attributes to "weakness in the energy sector."

Investment in housing, however, rose 2.9 per cent in 2016.

Exports of goods and services increased 1.1 per cent last year, while imports declined 1 per cent.

Household disposable income rose 3.8 per cent for the year, as employee compensation increased by 2.5 per cent. The household saving rate rose slightly, to 5.3 per cent from five per cent in 2015.

The Bank of Canada's next move

The Bank of Canada left its key interest rate unchanged on Wednesday, citing "significant uncertainties" ahead for the Canadian economy. Many economists believe the bank will continue to keep rates low, or even cut them, in the near future.

Despite the strong headline number in Thursday's GDP report, Derek Holt of Scotiabank Economics saw little that would bolster the argument for raising interest rates, citing weakness in export growth and business investment.

"In addition to zero evidence that the sources of growth are rotating toward investment and exports as the BoC has long wished for, there are additional reasons for all the heavy hearts at the Bank of Canada," wrote Holt.

He said economic uncertainty persists even after the meeting last month between Canadian Prime Minister Justin Trudeau and U.S. President Donald Trump in Washington.

"One reason for greater caution is that U.S. and global trade policy uncertainty persists, and the Trudeau-Trump meeting did not eradicate it in the face of potentially material 'tweaks' to NAFTA, U.S. border tax shenanigans, and the U.S. government's apparent quest to distance itself from the WTO."

With files from The Canadian Press