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Unexpected 1.1% Decline in Canada’s Economy During the Third Quarter

The Canadian economy faced an unexpected downturn in the third quarter, primarily due to stagnant household consumption. However, recent estimates indicate a slight uptick in growth last month.

Early figures suggest that the gross domestic product experienced a 0.2 per cent rise in October. This growth was fueled by increases in oil and gas extraction, retail trade, and construction. Nonetheless, these gains were offset by declines in the wholesale trade sector, according to Statistics Canada’s report from Ottawa.

This uptick marks the most robust monthly growth since May, following a 0.1 per cent expansion in September, surpassing expectations outlined in a Bloomberg survey of economists.

Despite the positive momentum in September, the economy saw a 1.1 per cent annualized contraction in the third quarter. This decline was more significant than both the anticipated 0.1 per cent rise in a survey estimate and the Bank of Canada’s forecast of 0.8 per cent. It nearly erased the entire growth from a revised 1.4 per cent increase in the second quarter. This rapid slowdown follows a robust 2.5 per cent expansion in the initial three months of the year.

With two consecutive quarters of nearly zero GDP growth and subdued household spending, the weakest in half a year since 2009 (outside the pandemic), indications suggest that the economy has essentially stalled. This situation contrasts sharply with the strong momentum observed earlier this year. Moreover, these reports strengthen the belief that the Bank of Canada’s interest rates are restrictive enough to impede consumption and moderate inflation.

A clearer portrayal of an economy stuck in a prolonged period of stagnation may prompt the central bank to maintain borrowing costs at five per cent. It could also lay the groundwork for potential rate cuts in the first half of the upcoming year if disinflation gains traction and if economic growth remains sluggish, aligning with economists’ expectations. Overnight swaps traders are betting on rate cuts starting in June, while economists see April as a more probable timing.

The upcoming output data, in conjunction with employment figures and the jobless rate set to be released soon, serve as crucial inputs for policymakers ahead of the next rate decision on Dec. 6. Despite the majority of forecasters in a Bloomberg survey expecting the central bank to keep rates unchanged for the third consecutive meeting, Governor Tiff Macklem recently indicated that excess demand has dissipated and the economy is likely to remain feeble for the coming quarters. This scenario is expected to exert further downward pressure on inflation. However, Macklem emphasized that it is premature to consider rate cuts and policymakers need solid evidence of inflation firmly aligning with the target before contemplating easing measures.

The third-quarter decline was primarily attributed to lower exports and slower inventory accumulation. Interestingly, despite record population gains from immigration, household spending remained stagnant. Additionally, business spending in various sectors like non-residential structures, machinery, equipment, and intellectual property declined.

September saw growth led by goods-producing industries, marking their first increase in six months, while service industries remained unchanged. Furthermore, there are indications that the higher rates are successfully cooling down the economy, evident in contractions in real estate, finance and insurance, entertainment, and recreation during that month.

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