Canada: GDP growth moderates in Q3 as exports contract
December 1, 2017
As expected, GDP growth moderated in Q3 after a breakneck first half of the year, in which the Canadian economy grew at the fastest pace among G7 economies. In Q3, GDP grew at a seasonally-adjusted annualized rate (SAAR) of 1.7%, falling sharply from the downwardly revised 4.3% expansion notched in Q2 (previously reported: +4.5% SAAR). GDP growth in Q3 was the weakest since wildfires in Alberta halted oil and gas production in the province and stunted the national economy in Q2 2016. That said, it was broadly in line with market analysts’ expectations of a significant moderation from the stellar readings recorded in the first half of the year. The weaker print in Q3 came as solid domestic demand was offset by a significant contraction in exports.
Driving growth in Q3 was domestic demand, which expanded a healthy 3.7% over the same period last year (Q2: +4.2% SAAR) on the back of robust spending dynamics and strong fixed investment growth. Household spending, which likely benefited from tighter labor market conditions and elevated property values, was solid despite moderating from the previous quarter, growing 4.0% (Q2: +5.0% SAAR). Moreover, consumers benefited from the appreciation of the Canadian dollar in the quarter. In a similar vein, government spending grew 3.0% (Q2: +4.0% SAAR). Fixed investment growth, on the other hand, accelerated to 3.5% in the quarter (Q2: +2.3% SAAR) as business investment—especially in machinery and equipment—more than offset the second straight quarterly decline in housing investment.
In the external sector, a reversal took shape in Q3 after posting an outstanding performance in the previous quarter. Export contracted 10.2% (Q2: +6.1% SAAR) as motor vehicle shipments declined largely because of work stoppages and changes to certain models destined for the U.S. market. Moreover, energy and mineral products bound for export, as well as consumer goods, also declined in the quarter. Exports of services, however, increased from the previous quarter on the strength of commercial services. Imports also recorded a contraction in the quarter, falling a marginal 0.2% (Q2: +6.6% SAAR) as the increase in imported services could not make up for the decline of imported goods. All told, the external sector’s net contribution to overall growth worsened to minus 3.2 percentage points (Q2: minus 0.1 percentage points).
Canada GDP Forecast
Having now cooled from the unsustainable growth notched in the first half of the year, GDP growth is expected to continue approaching potential in the coming quarters. In October’s Monetary Policy Report, the Bank of Canada modified its GDP growth forecasts for the coming years, upgrading its 2018 growth forecast to 2.1% from 2.0% and downgrading its 2019 growth forecast to 1.5% from 1.6%, respectively. FocusEconomics Consensus Forecast panelists expect growth to reach 2.2% in 2018, which is unchanged from last month’s forecast. For 2019, our panelists expect growth to edge down to 1.8%.
Author: Christopher Thomas, Economist