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Canada: Ready for Liftoff?

By Ari Charney on March 4, 2016

Canada may be down, but it’s far from out. And this week, there were two big numbers that suggest the country’s economy is gearing up for a strong rebound during the first half of this year.

First, we finally learned how the country’s economy performed during the fourth quarter. And it was quite a relief.

Although economists expected flat growth for the final quarter of 2015, Statistics Canada (StatCan) reported that gross domestic product (GDP) grew by 0.8% annualized. That may be a far cry from the 2.5% growth needed for the economy to be firing on all cylinders, but it blows away the consensus forecast of 0.0%–and it’s within shouting distance of U.S. fourth-quarter GDP growth, at 1.0%.

The fourth quarter’s better-than-expected growth also gives the economy a strong handoff to the first quarter, especially given the solid numbers posted in November and December.

Strong handoffs are important, as they’ve been big factors in past rebounds.

With the goods-producing sector still working through the commodities crash, it’s been up to the service sector to prop up the economy. Among the biggest contributors to growth were real estate, financials, and healthcare.

One big concern remains the decline in business investment. After all, you can’t really kick off a virtuous cycle of economic growth without it. On that score, business gross fixed capital formation has now fallen for four consecutive quarters, down nearly 7% from its high during the final quarter of 2014.

Prior to crude oil’s collapse, Canada’s energy sector accounted for roughly one-third of business investment, so the decline in the overall number is clearly a consequence of oil and gas producers’ aggressive belt-tightening.

Although Canada’s economic growth is expected to accelerate incrementally over each of the next five quarters, it likely won’t be at full capacity again until sometime during the second half of 2017.

In the meantime, the Canadian government is working out the final details of a budget that’s expected to be released later this month. And spending is expected to include some of the stimulus that Prime Minister Justin Trudeau promised during his election campaign.

With the country having already racked up a deficit of C$18.4 billion, Trudeau has ruled out any big-ticket surprises. But he acknowledged that there’s a limit to what monetary policy can do, and that it’s up to fiscal policy to pick up the slack.

Exports Hit an All-Time High

The other big piece of data this week is the news that Canadian exports hit a new all-time high in January, just shy of C$46 billion.

Exports had declined sharply as crude’s crash accelerated, but it looks like the lower exchange rate finally gave exports a much-needed boost, particularly when it comes to trade with the U.S.

The U.S. is Canada’s largest trading partner, absorbing about three-quarters of the country’s exports. And a falling loonie makes Canadian goods cheaper and, therefore, more competitive in the U.S. In January, exports to the U.S. climbed 2.6%, to C$34.9 billion, which is just slightly below the all-time high from last July.

Although the total value of energy sector exports fell by 28.5% year over year, other industries have more than compensated.

Canada’s automakers have been the biggest beneficiary of cross-border trade, with exports of motor vehicles and parts up 39.0% year over year, to C$9.1 billion. The gain in this category over that period has more than offset the decline in energy exports.

And exports of consumer goods jumped 40.8%, to C$7.3 billion, with particular strength from jewelry and pharmaceuticals.

Meanwhile, the rally in energy prices has helped lift the Canadian dollar off of its mid-January low. The loonie currently trades at US$0.75, up sharply from US$0.686 nearly seven weeks ago. However, this sudden strength could pinch exports in the months ahead.

But with an accommodative central bank and an infusion of stimulus spending, the Canadian economy is poised to accelerate. And given the recent action on the S&P/TSX Composite Index–the benchmark is up 12% from its year-to-date low–investors clearly expect an improving economy will boost stocks as well.

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