Slowing GDP to keep Bank of Canada on the sidelines

The last few bits of economic data before the Bank of Canada’s December rate announcement are now in, with the latest – a weaker-than-expected GDP report and softening labour numbers – pointing to another rate hold next Wednesday.

Combined, the numbers indicate the economy is slowing, which is what central bank policy makers want to see; in order to reign in inflation, they’ve increased Canada’s benchmark borrowing rate 10 times since last March, bringing it to a total of 5%, where it remains today.

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The GDP data in particular show economic growth was just strong enough to avoid a technical recession with third quarter growth essentially flat, coming off a 0.3% uptick in Q2.

According to Statistics Canada, which released both the quarterly and September readings on Thursday, real GDP declined -1.1% year over year, and -0.3% between July and September. This was significantly below the 0.1% growth consensus expected by economists, and the 0.8% growth forecasted by the Bank of Canada itself.

A drop in international exports and slower inventory accumulation were the main factors behind sluggish growth, says StatCan. Recent government spending and housing investments were successful in only partially offsetting that decrease. Housing spending remained sluggish, along with a scant 1% uptick in durable goods spending, led by the purchase of new trucks, vans, and SUVs. 

Spending for new housing construction, meanwhile, rose 2%, the first increase since early 2022. An increase in new construction (+6.5%) was partly offset by a decline in ownership transfer costs (-4.3%), which represents resale activity, states the report.

On a monthly basis, GDP rose 0.1% in September, led by a 0.3% uptick in goods-producing industries, which saw its first increase in six months. Preliminary data also indicates that October also saw an increase of 0.2%.

“Shocker” report seals deal for rate hold

That the economy slowed more than anticipated practically seals the deal for a rate hold from the central bank next Wednesday; the Bank’s rate is largely expected to hold status quo until at least next spring, when softer data could lead to cuts.

“Today’s Q3 GDP release was another shocker. The sharp drop in economic activity was totally unexpected, and in large part reflected downward revisions to monthly data in June through August,” writes Randall Bartlett, Senior Director of Economics at Desjardins. “The frequent and substantial revisions to these key economic data are making their interpretation difficult. Unpacking the release, it’s clear the Canadian economy experienced broad-based weakness in Q3.”

“Looking ahead, we’re currently tracking annualized real GDP growth in the range of 0.5% to 1% for the fourth quarter of 2023, in line with the 0.8% pace expected by the Bank of Canada in its October 2023 Monetary Policy Report. Along with a weakening labour market and the slowing pace of underlying inflation, today’s GDP data should keep the Bank on the sidelines for the foreseeable future. Indeed, we believe the next move by the Bank will be a cut in Q2 2024.”

Jobs growth continues to flatten

Meanwhile, Canada’s labour market – another factor closely-watched by the Bank – had a fairly modest showing in November. A total of 25,000 jobs were added to the economy, following 18,000 in October. While that marks a fourth consecutive increase, it’s to a smaller extent than anticipated. 

The unemployment rate also increased to 5.8% from 5.7%, totalling a gain of 0.8% since April.

“That scale of increase in unemployment over that period of time usually only happens in the early stages of a labour market downturn,” writes Nathan Janzen, Assistant chief economist at RBC. 

He added that waning consumer demand is now making itself seen in the jobs numbers, with November marking the first time since the pandemic that Canadian businesses reported falling demand for their products as their main concern, rather than tight labour conditions – another trend that’s sure to be noted by the central bank.

“Further softening in labour market data after a soft Q3 GDP report yesterday should reinforce that the Bank of Canada is done hiking interest rates for now,” he writes. “Higher unemployment to-date has come mostly via slower hiring rather than more firing.” 

“The BoC will also be cautious about pivoting to rate cuts too quickly, but our own assumption is that they will start to push the overnight rate lower in the second half of next year.” 

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