Canada’s hot housing market drove economic growth last year as 2021 ended on a higher note, giving more ammunition to a central bank set to raise rates.
According to Statistics Canada the economy grew 4.6 per cent last year, following a drop of 5.2 per cent in 2020. Growth in the fourth quarter reached 6.7 per cent. Rock-bottom interest rates and desire for larger homes spurred by large scale remote-working conditions drove households to add an unprecedented $182.4 billion in mortgage debt last year, the agency reported.
Output was flat at the end of 2021 as Statistics Canada said real gross domestic product was essentially unchanged in December, leaving the economy just 0.4 per cent above pre-pandemic levels recorded in February 2020.
The largest contributor to last year’s growth was household spending and the housing market as new home construction, resales and renovations increased at levels second only to 1983 when the country emerged from a recession the previous year.
The Bank of Canada recently pointed to a better-than-expected economic end to 2021, a roaring housing market and inflation rates at three-decade highs in lifting its promise to hold the key rate at its emergency level of 0.25 per cent.
If, as widely expected, the Bank of Canada raises its trend-setting interest rate on Wednesday morning, the interest charged on things like mortgages will go up and impact the $1.93 trillion in residential mortgage debt.
“I do view it as probably the most serious vulnerability in the economy as we look ahead,” said BMO chief economist Douglas Porter said of household debt, “but overall household finances are actually in better shape now as a whole than they were before the pandemic began.”
The federal government has pumped out hundreds of billions in aid over the course of the pandemic to help workers and businesses and a report from the finance department said businesses that received the wage subsidies were less likely to close during the pandemic.
Statistics Canada noted that government transfers to households declined in the fourth quarter and the level of household savings dropped further between October and December, though currently more than double where it was in the fourth quarter of 2019, pre-pandemic.
Parliamentary budget officer Yves Giroux says he expects the economy to rebound sharply in the second quarter and lead the economy to grow 3.9 per cent this year.
Giroux forecasted a federal deficit this fiscal year of $139.8 billion, and $47.9 billion in the next fiscal year that starts in April — both figures being lower than the government projected in its financial update in December.