Why the Q4 GDP numbers could spell more stimulus for the Canadian economy

The Liberal government’s case for additional spending may get a lift if fourth quarter GDP comes in worse than expected on Tuesday.

Canada still lagging behind U.S. growth, and also at this time, we’re nowhere near to catching up

Divergence in United states economies shows little manifestation of narrowing. While the U.S. economy performed better than expected within the final quarter of 2015, Canada’s output likely slowed because of the ongoing drag from low oil prices and weak business investment.

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It appears that GDP rose by a paltry 0.3 per cent for 2015 as a whole, which would mark the weakest 12-month gain since the final quarter of 2009.

“The problem is if the economy slightly expanded or contracted within the final quarter of this past year,” said Derek Holt, an economist at Scotiabank, in a note. “Q4 GDP could increase pressure on Ottawa to add stimulus on March 22nd once the Federal budget lands.”

Despite the slowdown, Pm Justin Trudeau’s campaign promise to inject the Canadian economy with fiscal stimulus has received lots of criticism, in large part since the projected budget deficit has ballooned to $18.4 billion for next fiscal year (starting April 1).

The higher deficits outlined in Finance Minister Bill Morneau’s recent fiscal update don’t include many of the Liberal’s election promises, such as infrastructure spending, so the final projection is likely to come nearer to the $25 billion to $30 billion range.

Holt noted that much of the economy’s deterioration occurred at the end of the 3rd quarter, in September, so it entered Q4 at a weak starting point.

“That was the only real monthly contraction out of the past 6 months, however it automatically put the Canadian economy behind the eight ball into Q4,” he noted.

That’s why a lot of the focus is going to be on how Q4 ended, and December GDP figures (also out Tuesday) will give you some answers.

The finance department is more conservative than the others, projecting nominal GDP growth of only 0.4 per cent in 2016, when compared with an average of 2.4 per cent among private forecasters.

RBC comes in near the low end, estimating average annual growth in nominal GDP of just one per cent for 2015 and 2016. That would be the weakest two-year performance outside of the 2008 financial crisis.

The bank also noted the actual stimulus from new programs may only be roughly 0.5 per cent of GDP.

If Q4 growth measures zero as anticipated, that will mean the Canadian economy didn’t grow in three of the past four quarters.

While many don’t like the idea of massive deficits, the ones that support the Liberal plan include David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

“I would recommend reviving economic growth with fiscal policy at a time once the energy sector is detonating and there is heightened uncertainty,” he wrote in a note. “Perhaps understand that the problems (oops, I meant challenges) that Canada confronts will find little when it comes to remedy from monetary policy – the country hardly suffers from high interest rates or perhaps an uncompetitive exchange rate.”

National Bank Financial recommended the Liberal government fully implement its election spending platform, while also creating a $20 billion special trust to invest in targeted projects that will make the greatest chance of growth.

With Canada’s current debt-to-GDP ratio of 31 per cent, National Bank Financial’s chief economist and strategist, Stfane Marion, believes ?the federal government has wide latitude to make use of these fiscal tools – “a more potent policy instrument in the present circumstances – to aid growth and ease the reorientation from the Canadian economy toward non-resource sectors.”

On budget day, Canadians will become familiar with the extent that the us government shares this view.

Financial Post

jratner@nationalpost.com