Canada: GDP growth decelerates in Q3 despite resilient domestic demand
Economic activity tapered in the third quarter, with seasonally-adjusted annualized (SAAR) growth decelerating from Q2’s 3.5% surge (previously reported: +3.7% SAAR) to 1.3% in Q3 but slightly beating market expectations nonetheless. In annual terms, economic growth softened to 1.7% in the third quarter (Q2: +1.9% year-on-year).
The external sector was chiefly behind the moderation in the headline growth figure. Exports of goods and services contracted 1.5% in seasonally-adjusted annualized (SAAR) terms, after soaring 12.9% in the second quarter. Meanwhile, imports of goods and services increased 0.1% in Q3, contrasting a 3.5% drop in the second quarter. As a result, the external sector subtracted 0.5 percentage points from the third quarter’s headline growth, contrasting the 5.2 percentage-point contribution in the previous quarter.
Domestic demand strengthened in third quarter, jumping 3.2% following a paltry 0.3% rise in the second quarter. Private consumption growth accelerated to 1.6% (Q2: +0.5% SAAR), while government consumption growth softened to 0.8% (Q2: +2.4% SAAR). Moreover, fixed investment increased 9.9% in the third quarter, rebounding from the previous quarter’s 2.2% contraction. The surge in fixed investment was driven by robust expansions in both residential and non-residential investment, which points to underlying strength in the domestic economy despite a weaker headline figure.
Commenting on Q3’s GDP reading, Daan Struyven, senior economist at Goldman Sachs, noted:
“Overall, we believe that today’s data will strengthen the BoC’s view that domestic resilience—especially in housing and the labor market—is currently outweighing the risks from the trade war. Following the stronger details and hawkish prior guidance by Governor Poloz, we believe that the odds of a cut next week have fallen below 5%. We continue to expect the BoC to keep its policy rate unchanged in 2019 and 2020.”
Looking ahead, the economy is expected to gain momentum in 2020 as solid labor dynamics and wage growth should continue to support household spending. Moreover, strong population growth, lower mortgage rates and government measures to support first-time home buyers should buttress residential investment. However, the U.S.-China trade war and uncertainty over the ratification of USMCA will likely continue to weigh on the external sector and business investment.