Exports to play vital role in supporting Canada’s economic growth in 2016

Canada’s economy expanded for the fourth consecutive month in January. The economy grew 0.6%, strongest monthly expansion since July 2013. Both services and goods drove the economic growth. Good producing industries performed the strongest, growing 1.2% in the month, led by manufacturing that expanded 1.9%. Meanwhile, production of oil and gas also grew, expanding 1.4%, while, utilities and construction grew 2.7% and 0.5% respectively. Service sector output grew for the 12th consecutive month, expanding moderately at 0.4%.

Strength in Canada’s economy was broad-based, with almost all major industries expanding in January. Admittedly, several month-on-month growth figures were due to one off factors or snap-backs after contractions. On the contrary, solid performance of January comes after three prior months of growth.

“The strong monthly performance supports our view that first quarter growth could reach 3% or more (annualized)”, says TD Economics.

The data continues to indicate that the shift towards exports/manufacturing led growth is starting to take effect. It might take around six quarters for the effect of past currency movements to take hold, and hence it is likely that exports will be a major driver in supporting Canada’s economic growth in 2016, according to TD Economics.

Persistent strength in exports and waning drag from investment are likely to lead to an average rate of 2% economic growth from Q2 2016, resulting in an overall growth of 1.9% for the entire 2016, added TD Economics. The near-term positive outlook is expected to be seen in the central bank’s next Monetary Policy Report.

“We expect to see an upgraded outlook that accounts for both near-term strength and the boost from last week's federal budget, which our calculations suggest will add 0.1 and 0.3 percentage points to growth this year and next, respectively”, notes TD Economics.

The Bank of Canada is likely to keep its policy rate unchanged until 2017 in spite of a positive economic outlook.