TD Says Q4 GDP Masks Solid Domestic Demand, Likely Leaving Bank of Canada on Hold

07:47 AM EST, 03/02/2026 (MT Newswires) -- Data flow was mixed this week in Canada, said TD.

Given the importance of business investment in forecasts for Canadian economic growth, the bank was "eagerly" anticipating last week's release of the survey of capital spending for 2026. Last year, nominal non-residential spending on structures and machinery and equipment increased about 5%. Economic uncertainty led to a pullback in private sector investment, although the public sector increased its investment spending significantly.

Investment intentions for 2026 in the survey flagged another outperformance by the public sector. However, the picture is a bit brighter compared with last year for the private sector, where nominal investment is slated to advance 3%, noted TD.

Last week's Survey of Employment, Payrolls and Hours (SEPH) offered a pulse-check on the jobs market in December. The report sent a much weaker signal than the earlier-released Labour Force Survey (LFS) jobs data, as payroll hiring was off 0.2% in the month while hours worked sagged.

While these reports gave important signals on the economy, the marquee event last week was the release of Q4 gross domestic product. Canadian real GDP contracted by 0.6% annualized in Q4. The knee-jerk reaction of markets was to shift the odds slightly more toward a rate cut this year -- though TD is assigning less than a 50% chance of one this year -- on the headline number.

However, peeling back the layers showed a better performance, added the bank . For starters, inventories were the main growth drag, as final domestic demand was up a sturdy 2.4% annualized -- stronger than TD's expectation -- boosted by consumption growth and government spending.

There was also a partial bounce-back in non-residential investment, consistent with the tone of the capital intentions survey. Net trade also contributed positively, driven by a solid gain in exports. Even the monthly, industry-based GDP for December was stronger than Statistics Canada had previously guided.

If there was one blemish in the GDP report, it was that output may have moderated in January, though even here, winter storms may have had a hand, added the bank.

Overall, Canada's economy felt the impact of the United States tariffs in 2025. GDP growth slowed from 2% in 2024 to 1.7%, with StatsCan pointing out the slowdown was mainly due to weaker exports to the U.S.

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