Canadian economy slows, but consumers going strong

Conventional wisdom holds that with households swimming in debt, nagging worries that home prices could slip and unemployment at 7.6 per cent, the consumer spending that's generating the bulk of Canada's economic growth can't possibly last.

Looks like conventional wisdom will have to wait.

Consumers' appetite for non-essential purchases will surely be tested if gas prices rise much further. In the fourth quarter, though, a 2.9-per cent annualized gain in household purchases -- about one-third more than in the prior three-month period -- helped the economy grow at a 1.8 per cent annual pace, matching expectations.

The economy's overall growth rate was much slower than the third quarter's 4.2-per cent pace, but the slowdown would have been much sharper without the pickup in consumer spending, as well as a 6.3-per-cent gain in business investment. That's because export growth, as expected, slowed to 4.6 per cent from 16 per cent.

Also, inventories subtracted 1 percentage point from growth in the quarter, suggesting companies are being careful not to over-produce in a climate of tentative global demand. Should demand increase or remain steady, businesses will have to ramp up their output to keep up, boosting growth in future quarters.

The fourth quarter's economic growth rate fell short of the 2 per cent pace the Bank of Canada was expecting, and is almost certainly not strong enough to put much of a dent into the country's jobless rate. And there is little in the report to suggest Finance Minister Jim Flaherty has been wrong to hint that the deepest cuts to government spending may not come in this year's budget, due for release March 29. (Although, it is interesting that the economy still eked out growth in a quarter where government spending plunged as money for infrastructure projects ran out.)

For all of 2011, the economy grew at a slower pace than in 2010, 2.5 per cent compared with 3.2 per cent. But the extreme uncertainty in the United States and Europe that dominated much of 2011 seem to be abating, even if neither of Canada's biggest traditional markets is poised for anything other than tepid growth for the foreseeable future. Things on this side of the border will hardly be rosy this year, but even some of the most cautious forecasters, such as TD Economics, are now making noises about upgrading their prognoses for the Canadian economy.

That is in no small part due to resilient consumer and business spending, the parts of the economy that are most sensitive to a low-interest rate environment. Most analysts do not see the Bank of Canada raising borrowing costs before next year -- at the earliest. Still, if consumer spending remains as much a contributor to growth as business investment this year, and as long as the central bank is concerned about Canadians piling on debt, that timeline could be moved up.