Canada: GDP growth eases in Q3
Economic momentum softened in the third quarter, with seasonally-adjusted annualized (SAAR) growth decelerating to 2.0% over the previous quarter (Q2: +2.9% SAAR). The print matched analysts’ expectations for Q3. Moreover, the reading was below Q2’s 2.9% quarter-on-quarter SAAR expansion. In annual terms, economic growth edged up to 2.1% in the third quarter (Q2: +1.9% year-on-year).
Domestic demand dimmed in the quarter due to a broad-based softening across several components. Private consumption growth fell in Q3 to 1.2% from 2.3% SAAR, weighed down by weaker spending on durable goods. Moreover, the Bank’s decision to hike rates in July could have influenced consumer’s consumption patterns and delayed any large purchases. Meanwhile, gross fixed capital investment continued to decline in the third quarter (Q3: -5.0% SAAR; Q2: -0.8% SAAR), driven by lower business investment. Government spending growth dimmed slightly (Q3: +1.8% SAAR; Q2: 2.7% SAAR).
The external sector continued to drive growth in the quarter, even though export growth decelerated to 0.9% SAAR from Q2’s 13.0%, with a decline in service exports partially offsetting higher exports of goods. Imports decreased 7.8% SAAR in the third quarter (Q2: +5.9% SAAR) on weaker demand for refined petroleum products, as domestic petroleum production rebounded due to the conclusion of maintenance work at certain refineries. As a result, the net contribution of the external sector rose from plus 2.1 percentage points in Q2 to plus 2.9 percentage points in Q3.
Reflecting on the implications of Q3’s print on the economy, Brian DePratto, senior economist at TD Economics, was downbeat:
“The details definitely disappointed. It is hardly an encouraging sign when the bulk of your growth comes from a contraction of imports, leaving final domestic demand negative for the first time since early 2016 […] Sure to be front and center instead are commodity price developments that are hammering Canadian producers. As discussed in our recent report, we expect the resulting production cuts to hit Q4 growth, with a full recovery not expected until at least mid-2019. This creates a risk to the outlook which means that not only is December’s decision bound to be a hold, odds are January 2019 will see a pause as well. That the details of today’s report are so soft only serves to reinforce this view.”
Looking ahead, economic growth will likely moderate slightly. Higher interest rates could continue to weigh on the real estate market, while the recent fall in oil prices, if maintained, could dampen the performance of the hydrocarbon sector. Household spending and a tighter labor market should continue to propel economic growth. The Bank’s projected slowdown going forward also suggests rates will likely be stable in upcoming quarters. However, the signing of the USMCA will support export demand and business investment.