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Economy ‘just keeping its head above recession waters’
Canada’s gross domestic product surprised on several fronts Thursday, but overall economists say the data suggest the economy is stalling.
Statistics Canada reported on Nov. 30 that third-quarter GDP contracted 1.1 per cent, compared with expectations of 0.1 per cent growth, according to Bloomberg.
The agency also revised the second-quarter reading up to 1.4 per cent growth, ruling out a technical recession or two consecutive quarters of contraction.
“Overall, there were a lot of moving parts in today’s releases given the historic revisions alongside the downside surprise to Q3’s headline number,” said Andrew Grantham, an economist with CIBC Economics.
“However, the underlying trend still appears to one of muted growth, and a decline in economic activity in per capita terms.”
Statistics Canada also released preliminary estimates for October, forecasting a 0.2 per cent monthly gain which “provides a solid foundation for the fourth quarter and raises the prospect of the economy quickly returning to positive growth,” said Capital Economics’ Stephen Brown.
Here’s what economists are saying about the latest GDP numbers and what they mean for the Bank of Canada and interest rates.
The central bank announces its next interest rate decision on Dec. 6.
Andrew Grantham, CIBC Economics
“Through all of the noise caused by revisions and swings in trade and inventories (which could have been influenced by the port strike early in the quarter) the underlying trend remains one of modest growth on aggregate but a decline in activity in per capita terms. While GDP should see a decent bounce in Q4, that will partly reflect a rebound from some of the supply constraints that impacted the third quarter. Overall the sluggish trend in economic activity and further decline in the job vacancy rate today keeps us on track for a first interest rate cut in Q2 next year, which is in line with our previous forecast.”
Nathan Janzen, RBC Economics
A revision to Q2 output prevented the Q3 drop from counting as a ‘second consecutive decline’. But the macro backdrop continues to look soft, particularly controlling for high levels of population growth that are boosting both the production capacity of the economy and the number of consumers. Labour markets have also looked softer — job vacancies separately reported this morning fell another six per cent in September and are down more than 30 per cent from a year ago. We expect the BoC to remain on hold for now with inflation still running above target — but our own forecast assumes the central bank will pivot to rate cuts starting to soften into next year.”
Tu Nguyen, RSM Canada
“With the economy contracting more sharply than expected in the third quarter, it’s time to switch the discussion from potential rate hikes to potential rate cuts. The Bank of Canada might announce the first rate cut in April 2024 to avoid a deeper recession than needed.”
Stephen Brown, Capital Economics
“The big picture is that the economy has stagnated since the first quarter and inflationary pressures are rapidly fading, so none of this should change the calculus for the Bank of Canada. We continue to expect the Bank to begin cutting interest rates early next year.”
Douglas Porter, BMO Economics
“There are plenty of unexpected cross currents in today’s release, but the big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters. One way to capture that is that in the six months to September GDP rose 0.04 per cent, or basically unchanged. The significant (upward) revisions to Q2 show us to not read too much into the decimal points on this report — don’t like today’s news?; Just wait, it will change tomorrow. For the Bank of Canada, the net result of the Q2 revision, the downside surprise for Q3 and the decent start for Q4 is nearly a wash, with perhaps a slight downside tilt. So, overall, 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.”
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James Orlando, TD Economics
“There is no reason for the Bank of Canada to hike again. When the BoC decided to hike in June and July it was because Q1 2023 growth was surging alongside a recoil in housing demand. But that was short-lived, with spending, employment gains, and overall inflation easing ever since. We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the two per cent target. This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.”
Bryan Yu, Central 1
“Despite the Q2 upward revision, the Q3 pullback was substantial and continued to highlight the challenges in the economy heading into 2024 even with the uptick in monthly GDP for October. Household spending is weak despite a strong population and likely to remain so as mortgage renewals sap household finances, and businesses ratchet back investment and hiring considering this demand. We remain of the view that challenging economic conditions keep the Bank of Canada on the sidelines next week and drive a rate cut early in the second quarter.”
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