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Canada’s economy stalled even as consumer spending held up

February 28, 2023

Authored by RSM Canada LLP

Edwin P. Reilly, CPA, CA shared this article

REAL ECONOMY BLOG | February 28, 2023

The Canadian economy stalled in the fourth quarter, eking out a 0.03% gain in a significant downside surprise from expectations of a 1.6% increase.

But the disappointing growth underestimated the spending strength of the Canadian consumers. Final consumption expenditures rose by a sharp 2.1%, after growing by only 1.1% in the prior quarter, Statistics Canada reported on Tuesday.

Most of the drag came in the inventory component, which dropped by 29.8%. The component contributed to a whopping 5.6 percentage point decline in total gross domestic product growth.

Canada GDP fourth quarter

That was the second straight big drop in inventories in the past year, the result of the significant rise in the first two quarters, when inventories surged by an eye-popping 3,172% and 7,633%, respectively.

The decline in inventory was mostly offset by a drop in imports, which dropped by 12% and contributed to a 4.4 percentage point increase in overall growth.

While there was little to no growth in the fourth quarter, there were reasons to believe spending demand remained resilient on top of the robust consumption number.

Disposable income grew by a significant 12.4% on an annualized basis, following a 2.0% increase in the prior quarter. Final domestic demand—which strips out inventories and investment—bounced back with a 1.0% increase after declining by 0.8%.

Given the positive data underneath the top-line number, the Canadian economy was able to avoid a recession in the fourth quarter and will most likely continue to avoid one in the first quarter. Early signs showed a still-strong labor market, which added more than 100,000 net jobs in January.

But the weak overall growth is adding some more risks to the timing of our forecast for a mild recession in the second half of the year. A recession could come earlier if consumption does not make up for the decline in investment, inventories and imports.

Another concerning data point was the 5.5% drop in nonresidential investment in equipment and machinery.

Facing higher borrowing costs and a slowing economy, firms pulled back on spending on durable capital goods, an important component that could drive more growth in the future.

The pullback was partly offset by a boost in intellectual property investment, which grew by 11.6% in the last quarter.

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This article was written by Tuan Nguyen and originally appeared on 2023-02-28 RSM Canada, and is available online at

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