Edited by The Greek Courier
In 2024, Canada became a haven for business as lower interest rates stimulated growth toward the end of the year. According to Statistics Canada, the economy expanded at an annualized rate of 2.6 percent in the fourth quarter, surpassing the Bank of Canada's projection of 1.8 percent. This growth was driven by increased consumer spending, strong business investment, and rising exports. However, after Donald Trump won the election, he threatened to impose tariffs, and economists are now warning that these tariffs could hinder economic momentum in 2025.
Pierre Cléroux, the chief economist at the Business Development Bank of Canada (BDC), explained to BNN Bloomberg that the strong economic performance is largely attributable to lower interest rates, which have boosted consumption, real estate investment, and business spending. “The numbers are very good; this is the impact of lower interest rates,” he stated. “Consumption is increasing, real estate investment is also on the rise, and even business investment is growing.” However, Cléroux warned that economic momentum might slow down in early 2025 due to Trump's tariffs.
Household spending increased
In the fourth quarter, household spending, which accounts for more than half of Canada's GDP, increased by 1.4 percent. This marks the highest rise since mid-2022. The main contributors to this increase were purchases of new trucks, vans, and SUVs, as well as increased spending on financial and telecommunication services. For the entirety of 2024, household spending rose by 2.4 percent. Purchases of goods increased by 1.6 percent, while spending on services grew by 3.0 percent, primarily driven by higher expenses related to rent, telecommunications, and financial services. On a per capita basis, household expenditures increased by 1.0 percent in the fourth quarter but declined by 0.6 percent over the entire year.
Residential construction increased
Residential construction surged 3.9 percent in the fourth quarter, its strongest quarterly growth since early 2021. Ownership transfer costs, which reflect activity in the resale market, jumped 12.5 percent, while new construction rose 2.2 percent, driven by single-home projects in Ontario. Despite the fourth-quarter rebound, residential construction fell 1.1 percent for the year, following an 8.5 percent drop in 2023. Spending on alterations and improvements declined by 4.7 percent, while new construction remained nearly unchanged with a 0.1 percent increase.
Business Investment increased
Business investment in non-residential structures grew by 0.7 percent in the fourth quarter, with building construction increasing 1.6 percent. Investment in machinery and equipment surged 4.2 percent, supported by higher spending on industrial machinery, aircraft, and transportation equipment. However, on an annual basis, business investment fell 1.8 percent, led by a 3.4 percent drop in building construction.
The completion of the Trans Mountain Expansion Project in May 2024 contributed to a 1.1 percent decline in engineering structures investment. Machinery and equipment investment dropped 2.1 percent, while spending on intellectual property products edged down 0.1 percent.
Exports rose
Exports of goods and services rose 1.8 percent in the fourth quarter, recovering from a 0.2 percent decline in the previous quarter. Statistics Canada reported that higher exports of unwrought gold, silver, platinum group metals, crude oil, bitumen, and passenger vehicles were the main drivers. Imports also increased, rising 1.3 percent in the fourth quarter after a 0.3 percent decline in the previous quarter. The increase was led by higher imports of metal ores and concentrates, pharmaceuticals, and transportation equipment. For the year, exports rose 0.6 percent, driven by crude oil, bitumen, travel services, and pharmaceutical products.
Imports increased as well
Imports also increased by 0.6 percent due to higher demand for travel services and clothing, footwear, and textiles. The terms of trade fell 1.0 percent in 2024 as import prices rose 2.2 percent, outpacing the 1.2 percent increase in export prices.
Corporate gains rose but wage growth slowed
Corporate gross operating surplus rose 4.6 percent in the fourth quarter, recovering from a 0.5 percent decline in the third quarter. Growth in the manufacturing and wholesale sectors, particularly in the motor vehicle industry and construction-related businesses, contributed to the increase. The transportation sector also posted strong gains, led by courier and rail services.
Meanwhile, wage growth slowed. Compensation of employees increased by 1.0 percent in the fourth quarter, down from a 1.7 percent gain in the third quarter. Wage growth in services-producing industries offset a decline in transportation and storage services, which were affected by the Canada Post strike during the holiday season. For the full year, wages grew 5.9 percent, marking the slowest annual pace since 2020. In the education sector, wages surged 13.8 percent due to retroactive payments and negotiated pay increases for education workers.
Average household saving rate rises
The household saving rate fell from 7.3 percent in the third quarter to 6.1 percent in the fourth quarter as disposable income growth (1.1 percent) lagged behind spending growth (2.1 percent). Investment earnings dropped 1.8 percent in the fourth quarter, marking the first decline since 2020. Despite the fourth-quarter decline, the average saving rate for 2024 was 6.1 percent, significantly higher than 2023’s 3.7 percent.
Property income payments rise at a slower pace
Property income payments, including mortgage and non-mortgage interest expenses, rose 11.1 percent in 2024 but at a slower pace than 2023’s 56.6 percent surge.
Interest Rates and Tariffs
The Bank of Canada reduced its policy interest rate five times in 2024. Although Canada’s economy performed better than expected in late 2024, trade tensions with the United States could hinder growth in early 2025. Economist Tu Nguyen from RSM Canada stated that the Bank of Canada’s upcoming decision on interest rates will depend on the implementation of certain tariffs, as reported by BNN Bloomberg. She mentioned, “If broad-based tariffs are not introduced, the bank might feel at ease to pause any rate changes. However, if tariffs are implemented, another rate cut may be necessary.” Unfortunately, the tariffs are here to stay.
Also, the Bank of Canada has been adjusting its monetary policy to support economic growth. Since June 2024, it has reduced its key policy rate from 5.0 percent to 3.0 percent as of January 2025. Pierre Cléroux noted that inflation has stabilized at 1.9 percent, keeping it close to the bank’s 2.0 percent target. “We’re back to price stability in Canada,” he said, adding that the policy rate could fall to 2.5 percent by summer 2025 if conditions remain stable. But they are not anymore.
When US tariffs take effect, Canada’s economy could face new headwinds, potentially impacting business investment and export growth. Economists warn that trade disputes could limit the Bank of Canada's ability to continue cutting rates.
No comments:
Post a Comment