MNI: Canada GDP Posts Surprise 0.1% Q3 Fall, BOC Saw 0.8% Gain

Canada's GDP shrank again in the third quarter according to a flash estimate from the federal statistics office with production disrupted by record wildfires, droughts and labor strikes, bucking the central bank's forecast of growth approaching 1% and widening the divide between a stalled economy and inflation remaining too hot for policymakers.

Gross domestic product declined at a 0.1% annualized pace according to Statistics Canada's preliminary estimate Tuesday, with the formal figure due next month. The third quarter ended with GDP being unchanged for a second month in September, according to another flash estimate. Second-quarter GDP declined at a 0.2% pace. 

"Factors such as higher interest rates, inflation, forest fires and drought conditions continued to weigh on the economy," Statistics Canada's report said.

Bank of Canada Governor Tiff Macklem held interest rates at the highest since 2001 at 5% last week and said the country isn't going into a deep recession though slow growth means there could be quarters with small negative prints. Even with growth stalling in recent months inflation remains nearly double the Bank's target at 3.8% and officials say it will take until 2025 to return to 2%. 

The third-quarter figure contrasts with the BOC's estimate that GDP would climb at a 0.8% pace and most private economists also saw growth running somewhere around 1%. The Bank had also forecast Q4 growth at the same pace as Q3.

Output was "essentially unchanged" in September as preliminary information suggests declines in natural resource extraction and gains in construction and the public sector, StatsCan said. August production was also mixed with eight of 20 industries showing expansion, led by wholesaling and the strongest oil and gas extraction in more than four years. Those gains were offset by the third straight decline in both manufacturing and retailing, while hospitality services were disrupted by wildfires. 

While Canada doesn't officially date recessions many economists say two consecutive quarters of negative growth often constitute a "technical" recession. At the same time, the declines are quite close to zero and could be revised away in future reports. That would still leave an economy that's been flat for much of this year. 

Other evidence of a fading economy has emerged in recent weeks with unemployment rising about half a percentage point from a record low. Households are also more worried now, with more than half of respondents seeing a recession coming according to the latest quarterly BOC survey. Macklem told lawmakers last night his biggest concern is getting inflation back to target and he rejects the idea Canada is moving into stagflation.