OTTAWA — The economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates by summer.
Real gross domestic product grew at an annual rate of five per cent in the fourth quarter, a full point above what analysts had expected and the largest quarterly increase in nearly a decade.
It outstripped the Bank of Canada’s forecast of 3.3 per cent growth on an annual basis. The central bank has its next scheduled announcement on key lending rates on Tuesday but observers expect its overnight rate will remain where it is, at an all-time low of 0.25 per cent.
The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.
Canada’s economy grew by 1.2 per cent in the fourth quarter, the largest jump since the third quarter of 2000, Statistics Canada reported.
Real GDP, a closely watched inflation-adjusted measure of economic performance, increased 0.6 per cent in December alone, a fourth straight monthly advance.
Economist Douglas Porter of BMO said the data marked a clean break from the recession that began to be felt in Canada in October 2008.
The Bank of Canada essentially declared that the recession ended last summer — a stance that was hotly debated in the months that followed, particularly because unemployment remained high and GDP increased minimally.
Porter said the fourth-quarter of 2009 was a major change from the ”devastating 7.0 per cent decline in the first quarter of last year.”
Paul Ferley, assistant chief economist at Royal Bank, said the numbers bode well for the year as a whole.
They are solid evidence that the economy pulled out of recession starting in the third quarter of last year, Ferley said.
”The strong rise at the end of the fourth quarter suggests strong momentum going into the first quarter of 2010.”
Third-quarter growth was also revised upwards 0.9 per cent from the initial estimate of 0.4 per cent.
The quarterly increase was below the 5.9 per cent growth in the U.S. economy, but the Canadian strength was more broadly based. American growth relied heavily on restocking inventories.
For a third straight quarter, growth in final domestic demand was led by increases in personal expenditures, government expenditures, and investment in residential structures.
Export and import volumes both rose for a second straight quarter, with growth in exports outpacing that of imports in the fourth quarter.
Goods-producing industries rose 2.1 per cent in the fourth quarter, the first quarterly gain since the second quarter of 2007.
Final domestic demand advanced 1.1 per cent as consumer spending continued to grow.
”Between the structure of the strong Q4 advance (no help from inventories) and the robust monthly results, this report shouts strength,” Porter said.
He said it raises the odds that the Bank of Canada will begin to hike interest rates in July and stay on that path.
Ferley said the central bank will likely want to see further evidence of sustained strength, but predicted rates will rise in the second half of the year and hit 1.25 per cent by year end, up a full point from today.