Michael Watkins
March 01, 2024
Weekly Market Update
Markets are strongly in the green as we close out the week. Canada’s gross domestic product expanded in the fourth quarter of 2023, rebounding from the contraction in the third quarter. The expansion was relatively mild, reflecting the challenges still faced by Canada’s economy amid tight financial conditions. As the Bank of Canada (BoC) raised interest rates to quell elevated inflationary pressures, a slowdown in economic growth was expected. On the positive side, however, the economy has been able to avoid a severe recession.
- Canada’s economy expanded at an annualized pace of 1.0% over the fourth quarter of 2023. This was a relatively strong rebound from the 0.5% contraction posted in the third quarter. Fourth-quarter growth was the highest in Canada since the first quarter of 2023.
- Canada’s economy benefited from a rise in exports. In particular, shipments of energy products rose sharply over the quarter, adding to overall economic growth. Household spending posted a small increase over the quarter, but this was mainly due to a rise in spending on motor vehicles, where purchases were delayed in response to supply chain challenges.
- Conversely, housing investment shrank over the quarter. Canada’s housing market slowed over the year as higher interest rates and elevated home prices took a bite out of demand. Low inventory of new homes for sale also weighed on real estate market activity.
- The fourth-quarter expansion likely gives the BoC more time to consider when to begin lowering interest rates. The BoC has expressed its intention to begin cutting interest rates but has also acknowledged more work needs to be done to bring inflation down to its 2% target.
Gross domestic product data is showing the Canadian economy is slowing, but that it might not fall into a recession. That was a consistent fear as the BoC began raising interest rates at an aggressive pace. Markets are expecting the BoC to hold steady, at least in the short term, as they continue to deal with pesky inflationary pressures. It seems likely that rate cuts might not be coming until later in 2024.
Looking at the big picture, the Organisation for Economic Co-operation and Development (OECD) reported that global economic growth remained relatively muted in the fourth quarter of 2023. Tighter financial conditions have weighed on households and businesses, weighing on demand, which has dragged down economic activity. Despite muted growth, the global economy has been able to avoid a deep recession even though central banks have aggressively lifted interest rates in response to decades-high inflation.
- The OECD says the economy of its members rose by 0.4% in the fourth quarter of 2023, unchanged from the third quarter. Economic growth was relatively weak over the past two years as demand was weighed down by the rapid increase in interest rates from global central banks.
- Among G7 countries, economic growth was also 0.4%. G7 growth was buoyed by the world’s largest economy, the US, which advanced by 0.8%. US growth helped offset gross domestic product (GDP) contractions in Germany, the UK and Japan.
- The OECD says Canada’s economy grew by 0.3% in the fourth quarter. This is based in part on provisional estimates. Statistics Canada will be releasing Canada’s fourth-quarter GDP growth this Thursday. Canada’s economy slipped in the third quarter of 2023, shrinking by 1.1%, annualized.
- Fourth-quarter trade among G20 countries was also relatively lacklustre. The total value of merchandise trade was largely unchanged compared to the third quarter. The US saw a decline in exports, while exports from China rose over the month. Meanwhile, services trade volume edged higher over the quarter.
Global economic activity remains relatively muted amid the sharp rise in interest rates over the past few years. Still, signs are pointing to the global economy potentially avoiding a recession. And with inflation coming down, central banks might have the opportunity to pivot this year and begin lowering interest rates.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review.
Source: CIBC Morning Market Brief