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GDP data weakening in Canada

Not quite a recession, but Canada sees third-quarter growth turn negative

There was growing talk of the “R-word” (recession) leading up to today’s GDP data release, given the third quarter could have marked the second straight month of negative growth.

Instead, markets received another R-word…revision.

While Statistics Canada revealed that real gross domestic product (GDP) fell 0.3% quarter-over-quarter in Q3, it also revised up its previous negative reading for Q2 to positive growth of 0.3%.

This avoided two straight quarters of declining GDP, which many consider the technical definition of a recession.

“Whatever label you slap on this economy, it’s basically not growing, despite the artificial sweetener of rapid population growth,” noted BMO Chief Economist Douglas Porter.

“But reinforcing the point that it doesn’t quite sink to the level of recession, the initial read on monthly GDP for October was a surprisingly perky +0.2%, confounding expectations that activity would shrink in Q4,” he added.

“It’s not a technical recession, but it’s not good either,” wrote TD’s James Orlando.

Economy is weak no matter how you slice it

On an annualized basis, GDP fell less than expected by 1.1% in Q3. That followed an upward revision in Q2 to +1.4% from -0.2% previously.

Housing investment was a positive contributor to growth in the quarter, rising +8% quarter-over-quarter following five straight quarterly declines.

“Still, the details of the Q3 data were soft—GDP would have declined a larger 3% in the quarter without a 7.3% jump in government spending,” noted RBC’s Nathan Janzen.

Meanwhile, international trade was a net negative for growth, with exports of goods and services down 5.1% from the previous quarter, led by a 25.4% drop in refined petroleum energy products.

Imports were also down by 0.6%, led by “declines in clothing, footwear and textile products, transportation services, and electronic and electrical equipment and parts.” Household spending was flat in the quarter, following a similar flat reading in Q2.

GDP figures reinforce a BoC rate hold, but too soon for cuts

Today’s results are expected to keep the Bank of Canada on the sidelines at its net monetary policy meeting next week, and into the new year.

Economists say continued weak growth in the coming quarters should help bring inflation back to (or near) the central bank’s target of 2%.

“Overall, today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” said Porter.

Others believe continued weak growth will be enough to herald in the central bank’s first rate cuts as early as April of next year.

“We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the 2% target,” noted Orlando. “This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.”

CIBC’s Andrew Grantham agreed, saying the “sluggish trend in economic activity and further decline in the job vacancy rate today keeps us on track for a first interest rate cut in Q2 next year.”