MNI: Canada Q3 +1% GDP Matches Mkt Forecast But Lags BOC Call
Canada's economic growth slowed to a 1% annualized pace in the third quarter as stronger household and government spending was offset by weaker business investment, lagging the central bank's forecast as officials consider making another jumbo interest-rate cut next month.
Gross domestic product slowed from the previous 2.2% pace in the first slowdown since a year ago according to Statistics Canada's report Friday from Ottawa. While the third-quarter pace matched a market consensus it was short of the Bank of Canada's October estimate for 1.5% growth. That's another disappointment as officials have said their four rate cuts this year will boost growth.
Monthly output figures economists focus on as a sign of momentum going into the fourth quarter were also mixed, with growth of 0.1% in September lagging the market forecast of 0.3% while StatsCan's flash reading for October showed a 0.1% increase. The BOC has forecast growth rebounding to 2% in the fourth quarter.
Household expenditures showed signs of responding to rate cuts in the third quarter with a 3.5% gain led by autos that was the fastest since the start of last year. Housing investment also climbed for the first time in a year. Business investment continued to stumble with capital spending down 3.6%, the fourth decline over the last five quarters. Slower non-farm inventory accumulation from autos and manufacturing also dragged on growth.
The report is the most influential one due before the Bank of Canada’s Dec. 11 rate decision, with a job report next Friday unlikely to substantially move the needle. Governor Tiff Macklem quickened the pace of cuts to a half-point in October from three prior quarter-point moves and investors are split on the size of the next reduction from today's 3.75%. Officials are more confident inflation is settling back down at their 2% target and have said more rate cuts can be justified if things stay on track, with the main risks around household spending and finances.
Ahead of the new threat to trade this week of a 25% U.S. tariff on shipments to the U.S., Canada's exports fell faster than imports for a second quarter.
Another area the Bank is watching -- weak per capita GDP and household spending -- showed mixed results. Output per person fell for the sixth consecutive quarter, while that measure of household spending increased in Q3. Some economists say the long trend of mediocrity amounts to a hidden recession alongside rising unemployment at a time when the Bank's policy rate remains well above the last inflation reading of 2%.
The Bank says the economy has opened up a modest amount of slack following its previous 10 rate hikes to 5%, the highest since 2001. Judging the tightness of Canada’s economy is complicated with the biggest influx of immigrants in decades boosting labor supply and creating more demand, especially in a stretched housing market.
Inflation hotspots remain such as housing costs and wage growth still around 5% at a time when officials have said that’s out of line with stagnant worker productivity.