Business·Analysis

Startling Canadian GDP numbers could signal economic turning point: Don Pittis

Even if they overstate the strength of the Canadian economy, January's startlingly good GDP numbers offer businesses and consumers a confidence boost. They may be a sign that rather than being a drag on the global and North American economies, Canada is ready to help push.

Stats feel too good to be true, but such strong growth figures are an encouraging sign

Canadian durable goods manufacturing was up a startling 2.6 per cent in January after a 1.2 per cent increase in December, surprising economists who had predicted GDP would only be half what the actual numbers showed. (Canadian Press)

In economics journalism the normal rule is that only gloomy news sells. Canada's latest economic growth figures are so startlingly good that they make a rare exception.

The first inclination for any self-respecting business journalist is to look for the dark lining within the silver cloud. A little more on that later.

But while the Canada economy faces many challenges yet, such strong GDP data are very hard to dismiss. They offer hope that rather than being a drag on the global economy, a newly optimistic Canada may be part of the solution.

It is hard to exaggerate the significance of these January growth figures, described as "rip-roaring" by the usually careful BMO economist Doug Porter. For one thing they were unexpected, double what economists had predicted.

Staggering growth rate

While 0.6 per cent growth may not seem like much, we must remember this is a monthly number. If we had 12 months like that, the annual growth rate would be in the range of a staggering 7 per cent, unheard of in an advanced industrial economy. 

The new numbers provide vindication for what seemed like Pollyanna-like predictions by Bank of Canada governor Stephen Poloz who, during the darkest days of the oil crash, promised that the balancing effect of a low Canadian dollar would eventually recharge non-resource industries.
It seems Bank of Canada governor Stephen Poloz has been vindicated in his prediction last year that there were signs non-resource export growth was on the rebound. (Reuters)

The GDP figures also offer vindication for the economic strategy of the previous Conservative government, because it is difficult to see how the new Liberal government's policy could have taken effect in time to cause these growth statistics. 

Perhaps the prospect of new government spending promised in the autumn election campaign enticed some businesses to loosen purse strings.

Whether or not that is true, the new data bodes well for the current government's fiscal spending strategy. As mentioned previously, government spending only boosts, but cannot replace, weak economic activity. On the other hand, when growth is already happening, even a small burst of spending can have a jump-start effect, helping to convince capital to get off the sidelines and back into the active economy.

A Canadian glimmer of light

A Financial Times editorial described Canada as a glimmer of light in a world of "sluggish economies" because of its willingness to use fiscal spending to help boost global growth. But these latest figures may indicate Canada is providing something even more valuable: leadership in actual growth, not just growth created by artificial stimulus. 

And in the current climate, a little growth can lead to even more growth.
According to the theory of 'animal spirits,' putting on a happy face due to encouraging economic data can result in a virtuous circle of economic confidence. (Reuters)

If you accept the "animal spirits" analysis offered by Poloz at the end of last year, optimism is more than just a good feeling. It has real economic consequences, especially after an extended period of gloom.

Such a burst of real growth could have another advantage for the current government's plans. It would reduce the worry of a debt overhang caused by the Liberals' deficit spending spree. Real economic growth creates new revenue, simultaneously cutting the debt ratio by expanding the bottom half of the ratio's fraction.
Finance Minister Bill Morneau was already getting international kudos for his stimulus budget, but now there are signs Canada's real growth rate may pull, not drag, the global economy. (Reuters)

While the past three months' growth numbers are strong enough to assure us that the January figures are not "fluky" according to Porter, we cannot expect such strong economic activity to continue month after month. No one is expecting 7 per cent growth this year. 

Hazards ahead

At the same time, as mentioned, there are many real and potential challenges ahead for the Canadian economy, many of them raised just this week.

Despite a healthy contribution to January's GDP from the oil and gas industry, the Bank of Canada warned on Wednesday that the energy slowdown is far from over. Deputy governor Lynn Patterson reminded us that while oil output has remained strong, job losses in the sector will continue to have a negative multiplier effect on Canada's energy-producing economies over a period of years.

Also this week, a new warning about Canada's growing private debt pile. Well-known international economist Steve Keen placed Canada in a club of "seven countries most vulnerable to a debt crisis."

Big mortgage? Big worries

As Poloz has reminded us, economic growth often leads to higher interest rates, and Canadians with enormous mortgages may find themselves overextended once rates begin to rise.

And while the economy may be growing, unemployment remains much higher than in the U.S. despite a labour force being depleted by the decline of the baby boom bulge.

Threatening as they are, all those perils are far more manageable if the Canadian industrial economy is growing, not shrinking. 

And while the OECD cut its global growth rate forecast from 3.3 to 3 per cent this week, it is very encouraging to imagine that this time, Canada is no longer part of the problem, but may actually be part of the solution.

And that's no April Fool.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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