Canada's economy posts surprise annualized fourth quarter growth of 2.6%

By Promit Mukherjee

OTTAWA (Reuters) - Canada's gross domestic product in the fourth quarter expanded by 2.6% on an annualized basis, surpassing widespread expectations, as a jump in consumer spending, business investments and exports lifted growth, data showed on Friday.

Analysts polled by Reuters had expected the GDP to grow by 1.8% in annualized terms in the quarter ending December, similar to Bank of Canada's predictions from last month.

The third quarter growth rate was revised to 2.2% from 1% earlier, Statistics Canada said. It added that, on a month-on-month basis, the economy in December expanded by 0.2%, reversing the contraction seen in November.

This was mainly due to healthy growth in retail sales and a sales tax break that started from mid-December, it said.

The monthly GDP figures are calculated by industrial output while quarterly figures are calculated by spending and expenditure.

An advance estimate shows that monthly growth would likely be 0.3% in January.

The Canadian dollar extended gains after the data and firmed 0.15% to 1.4417 against the U.S. dollar, or 69.36 U.S. cents. Yields on the two-year government bond rose 1.6 basis points to 2.639% after the data was released.

Household spending, which accounts for more than half of total GDP, rose 1.4% in the fourth quarter, registering its biggest jump since the second quarter of 2022, Statscan said.

Residential construction rose by 3.9%, its largest quarterly rise since the first quarter of 2021, while business investments, which have mostly been a laggard for the last 11 quarters, posted a growth of 0.7% in Q4, led by a 4.2% increase in investment in machinery and equipment.

On a per capita basis, real GDP rose 0.2% in the fourth quarter, the second increase in the last seven quarters.

Canada's economy, which had been sluggish for the better part of last year, has shown signs of improvement lately as interest rates fell from over two-decade high levels from the middle of last year.

The BoC has cut rates by 200 basis points from June to 3% in January in its bid to prop up economic growth, especially as reducing immigration numbers and an impact of widespread tariffs from the U.S. pose major risk to growth.

The bank has said that it might have to cut rates to support the economy in the event of sweeping tariffs. However, a healthy fourth quarter GDP is likely to help the bank pause the rate cutting cycle.

"All points to the fact that absent the tariff threat, there would be substantial grounds for optimism over 2025 prospects, and perhaps a good reason for the Bank of Canada to take a pause on rate cuts," said Avery Shenfeld, managing director and chief economist at CIBC.

Sweeping tariffs of 25% could hit almost all Canadian exports by as early as March 4.

In the event of tariffs, the BoC's rates decision due on March 12 could be a cut, Shenfeld said.

Currency markets reduced their bets marginally for a 25 basis point rate cut next month to below 50% after the data was released.

(Reporting by Promit Mukherjee; Editing by Dale Smith, Kevin Liffey and Nick Zieminski)