GDP beat masks weakness underneath: What economists are saying about the numbers

Despite a stronger than expected GDP reading for the third-quarter, economists warn that weaknesses are appearing in Canada’s economy.

Canada’s economy beat the Bank of Canada forecast for the third quarter expanding at an annualized rate of 2.9 per cent, Statistics Canada reported Tuesday. In the central bank’s most recent monetary policy report from October, it projected third-quarter real GDP of 1.5 per cent.

However, many economists noted that the seemingly upbeat reading masks trouble spots, including rising inventories due to falling consumer spending, which dropped one per cent in the quarter.

The last time consumer spending contracted, beyond during the COVID lockdowns, was in 2009, said BMO Economics’ Benjamin Reitzes.

Other weak points were slowing housing activity, down 15.4 per cent in the quarter with more “downside ahead,” Reitzes said in an analysis posted on BMO’s web site.

“The smaller 0.1 per cent month-over-month rise in GDP in September and the preliminary estimate that GDP was unchanged in October imply that growth will slow sharply this quarter,” said Stephen Brown, senior Canada economist at Capital Economics.

Here is what the economists are saying about Canada’s GDP numbers and what they could mean for the Bank of Canada and rate hikes.

Stephen Brown, Capital Economics

“While the economy still performed better than expected in the third quarter, the smaller 0.1 per cent month over month rise in GDP in September together with the preliminary estimate that GDP was unchanged in October imply that growth will slow sharply this quarter (the fourth quarter). With the Bank telling us last month that it is trying to balance the risks of over- and under-tightening, and the latest CPI data showing a further easing of underlying inflation pressures, we judge that the Bank will drop down to a 25 basis-point hike next week.”

Article content

Nathan Janzen, RBC Economics

“Consumer confidence has softened along with the pullback in housing markets, weaker financial markets, surging inflation, and higher borrowing costs. And higher interest rates will continue to gradually feed through more significantly to actual household borrowing costs in quarters ahead. Some early signs that broader inflation pressures have started to ease, and indications that domestic demand is softening, mean the Bank of Canada could be close to the end of the current interest rate hiking cycle. But today’s data remains consistent with our own outlook for softer GDP growth in Q4 and a ‘moderate’ contraction in output in the first half of 2023.”

Benjamin Rietzes, BMO Economics

Article content

“The better Q3 headline masks underlying softness. Final domestic demand fell 0.6 per cent annualized in the quarter, not a sign of strength. While September was a small positive, the flash for October points to slowing momentum. Despite the details for Q3 and monthlies coming in a bit weak, the big upward historical revisions mean the economy is substantially larger than previously thought. There’s nothing here to keep the Bank of Canada from hiking rates 50 basis points at the December policy announcement.”

James Orlando, TD Economics

“Canada’s economy continues its streak of above trend growth in the third quarter, but there are worrying trends under the headline. Going into today’s report, we were looking for the impact of loosening supply chains and the push to develop Canada’s infrastructure to take advantage of our abundance of natural resources. This showed up in strong export growth and continued investment of machinery, equipment, and non-residential structures. However, rising interest rates and high inflation have weighed on consumer spending, a trend which has started earlier than expected, but should last through next year.

“Canadian bond yields are moving higher this morning, with the Canadian two-year and 10-year at 3.97 per cent and 3 per cent. It is expected that the BoC will continue to hike its policy rate by 50 basis points in December, though we believe an end to the hiking cycle is coming. The interest rate sensitive sectors have retrenched, with residential investment down 15.3 per cent in Q3. This is flowing to the consumer side of the economy, which will force the BoC to soon pause and wait for the impact of past interest rate hikes to have their effect on the economy.”

Article content

Andrew Grantham, CIBC Economics

“On the surface, the Canadian economy performed much better than expected in Q3, with GDP rising by 2.9 per cent (consensus +1.5 per cent) and representing only a modest cooling relative to the prior quarter. However, the more you dig into the details, the weaker the economy looks, with growth driven largely by exports and inventory building. Domestic demand was actually lower than in the prior quarter, with that drop including an unexpected decline in consumer spending. Because of this, the stronger headline growth figure shouldn’t be a concern for the Bank of Canada, and we continue to see only a further 50 basis point of tightening to a peak interest rate of 4.25 per cent.”

Charles St-Arnaud, Alberta Central

Article content

“We expect economic activity to slow in the last quarter of 2022 as the sharp increases in interest rates continue to take their toll on economic activity, especially residential investment and consumer spending. How strong consumer spending will be will depend on households’ willingness to spend the money saved during the pandemic, especially as inflation erodes households’ purchasing power and higher interest rates lead to higher debt-service payments.

“Today’s GDP number does not change our view that the BoC will hike by 25 basis points at the December meeting. While growth was more robust than expected, most of the strength comes from likely one-off increases in exports. Moreover, a weakening domestic economy suggests that previous rate hikes are having the intended impact on the economy.”

• Email: [email protected] | Twitter: gsuhanic

Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts. Check out the latest episode below: