Annualized growth of Canadian GDP in 2009 Q4 reached 5%, the highest result recorded since 2000 Q4. It is 1.7% more than the Bank of Canada expected. While there were more countries which recorded high growth numbers in the last quarter of 2009 (especially mentioning USA), Canada offers something more.

US reached 5.9% growth in 2009 Q4, more than Canada; however, we have more reasons to be optimistic. The difference is called inventories. Around two thirds of the US GD lift can be contributed to the built-up of inventories. On the other hand, Canadian inventories fell by over $4 billion in Q4 ($1.5 billion in 2009 Q3) and actually detracted 1% off the growth result.

Why is this important? Inventory dynamics help us to understand the short term future growth development. When US manufacturers are filling warehouses, it means the demand is lagging the production. Given the recent results of consumers' confidence, demand will probably not boost significantly in the near future. So once the warehouses are filled, manufacturers will have to slow down again. This will be of course reflected in GDP growth numbers.

Our numbers show the opposite situation. Demand in Canada is rising but the manufacturers do not respond at the same pace (despite the large recent growth), so the inventories are tapped. As the inventory level will continue to drop, manufacturers will have to react.

One can smell overheating and inflation here. However, this is the time for the Bank of Canada to react. Expected interest rate rise will slightly cool both private and corporate consumers, so production can keep running at healthier pace.
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