The Canadian economy shrank in the third quarter as higher rates weighed on consumer and business spending, but has so far managed to skirt a recession after a significant upward revision to second quarter GDP figures.
Statistics Canada released its gross domestic product report Thursday, which shows the economy contracted 1.1 per cent on an annualized basis.
It also revised up its reading for real gross domestic product in the second quarter, noting the economy did not shrink, but rather grew 1.4 per cent on an annualized basis.
While the decline in the third quarter was offset by growth in the second quarter, economists reacting to the new data say the trend is clear: the economy is teetering.
“The big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters,” wrote BMO chief economist Douglas Porter in a client note.
The federal agency says a decrease in international exports and slower inventory accumulation by businesses were partially offset by increases in government spending and housing investment in the third quarter.
It also reported new housing construction in the quarter increased for the first time since early 2022, led by apartment construction.
Bank of Canada interest rate hikes have been putting pressure on consumer and business spending as they both face higher borrowing costs.
Thursday’s report shows consumer spending continues to be flat for a second consecutive quarter.
Households are instead saving more as disposable income surpassed the rise in nominal spending.
The report says government transfers, namely the doubling of the GST rebate in the summer, propped up incomes as the labour market weakened.
Meanwhile, business capital investment fell by two per cent in the third quarter.
TD director of economics James Orlando noted there were one-off factors that affected the economy in the third quarter, such as the B.C. port strike and widespread wildfires.
“Some of the weakness that we got in summertime seems to be bouncing back a little,” Orlando said.
Statistics Canada’s preliminary estimate for real GDP in October suggests the economy grew 0.2 per cent, following a 0.1 per cent increase in September.
The Bank of Canada has been striving to pull off a soft landing, meaning higher interest rates slow the economy just enough to bring down inflation but not to the point of a recession.
Orlando says Canada appears to be experiencing a soft landing right now as the country averts a sharper downturn.
“If you asked me two years ago, ‘How would the Canadian economy respond, given we have high consumer debt loads, and the fact that the Bank of Canada raised interest rates from, like, zero to five per cent’ … most people thought we would’ve had a serious recession by now. And we haven’t,” Orlando said.
Canada’s inflation rate has fallen from a high of 8.1 per cent in the summer of 2022 to 3.1 per cent in October.
The central bank is set to announce its next interest rate decision on Dec. 6, after choosing to hold its key rate steady at five per cent at its last two announcements.
Economists widely expect the Bank of Canada to remain on hold as inflation slows and the economy weakens.
“Today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” Porter said.
The Bank of Canada has doubled down on its willingness to raise rates further if inflation doesn’t come down fast enough and has brushed off any discussion of rate cuts down the line.
Statistics Canada will be releasing its November labour force survey on Friday, which will offer economists more insight on whether economic momentum has continued to slow.
This report by The Canadian Press was first published Nov. 30, 2023.
Economists expect inflation reaccelerated to 3.1% in February
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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.
Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.
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Article contentArticle contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.
Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.
Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.
‘Can’t afford missteps’: Desjardins Financial
The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”
They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.
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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.
Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.
“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.
‘Inflict too much damage’: National Bank
The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.
“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.
They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.
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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.
Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.
The trio expect very tepid growth for 2024 of 0.3 per cent.
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Rising gas prices: RBC Economics
Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.
Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).
China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.
Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.
Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.
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Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.
Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.
“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.
China’s shaky domestic demand
Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.