Canadian economic growth likely to accelerate further in 2016, led by manufacturing exports

Canada's real GDP grew at an annualized rate of 0.5% in Q4, surpassing expectations of a flat reading by both market and the Bank of Canada. Canada's GDP growth for the past quarters was also revised slightly. The GDP growth for Q1 and Q2 of 2015 were revised slightly lower, whereas the Q3 growth was upwardly revised to annualized rate of 2.4% from 2.3%. Therefore the real GDP for the entire 2015 grew 1.2% as a whole, roughly half of 2014's pace. GDP growth in nominal terms expanded a moderate 0.4% in Q4 after expanding 3.1% in Q3.

Consumption continued to be the main growth driver, increasing 1.1% q/q, as compared with 1.6% in Q3. The slowdown in consumer spending can somewhat be linked to durable goods, where consumption expanded at 2.2% after growing 10% in Q3. Residential investment also continued to be positive, growing 1.8% in Q4, its fourth consecutive growth.

Meanwhile, net exports also contributed positively to growth, but the details were not much encouraging. Exports declined 2.2%, whereas imports declined 8.9%, the biggest quarterly decline since 2009. This truly showed the weakness in domestic demand during the quarter that subtracted 0.6 percentage points from growth.

Business investment was lower again. Non-residential structures, equipment investment and machinery declined further at an annualized rate of 12.4% in Q4. The level of investment in this category has dropped by over 13% from its peak in 2014. Moreover, investment in intellectual property was leading growth lower as mineral exploration investment continues to decline.

Furthermore, GDP growth on a month-on-month basis also exceeded expectations, growing 0.2% after expanding 0.3% in November. This shows that a decent amount of momentum exists, continuing into Q1 2016. Manufacturing output grew 1.1%, leading the way higher. Durable and non-durable goods were strong, helped by coal, chemical and petroleum products.

Growth in Q4 2015 seems to have been positive, but looking through details, a duller picture is seen as growth was greatly helped along by contraction in imports as domestic demand weakened. Even in the growth areas, a slowdown was seen in household consumption, residential investment. The adjustment of business investment to lower oil prices continued to subdue growth in Q4, as was the case throughout 2015. Meanwhile, exports also declined.

The outlook for growth seems to be positive. Q1 2016 growth is not expected to be highly spectacular for the economy, but strong momentum heading towards 2016 implies that the rate of growth is likely to see an uptick, as domestic demand seems to have recovered heading into 2016. Furthermore, the Canadian economy is likely to accelerate further while approaching mid-2016. Manufacturing exports are expected to lead the way.

"Despite this support, growth is likely to track around 1.8% over the medium term as the economy continues its multi-year adjustment process to lower oil prices and a weaker loonie", says TD Economics.