Weak Third-Quarter Growth Keeps Bank of Canada Cutting

Article content

(Bloomberg) — Canada’s economy posted a smaller gain last month after a weaker-than-expected third quarter, keeping the Bank of Canada on track to keep interest rates on hold.

Article content

Article content

Preliminary data suggest gross domestic product rose 0.1% in October, Statistics Canada said Friday. That followed a similar 0.1% increase last month, which missed economists’ expectations and ended the third quarter with annual growth of 1%.

Article content

The Bank of Canada had expected a 1.5% increase between July and September, while economists in a Bloomberg survey had forecast a 1.1% gain. Overall, this is down from the upwardly revised growth of 2.2% and 2% in the second and first quarters, respectively.

After the release, overnight traders increased their bets to get another quarter of a point cut from the central bank, making the odds more than a third, up from one in four previously. The loonie fell to C$1.4035, while Canadian government bonds rallied, with the two-year yield falling nearly 5.5 basis points to 3.12% and the 10-year yield sinking 6.7 basis points to 3.15%.

Household spending rose 3.5% in the third quarter, the fastest pace since the start of 2023, and follows the start of the central bank’s rate cut in June. Income growth slowed but remained strong, and the household savings rate rose to 7.1%, the highest figure in three years.

Business investment was the biggest drag on growth last quarter, while non-residential business investment fell 11.3%, giving back half of last quarter’s big gains. Domestic final demand rose by 2.4%.

Article content

Article content

Weaker-than-expected growth means the central bank will continue to cut borrowing costs, but there is little evidence that the country’s economy is in deep trouble. The top revision shows that the Canadian economy is bigger than previously thought, on the combination of strong housing consumption in 2021 and better prospects for business investment in 2022 and 2023.

The central bank’s decision is scheduled for Dec. 11. Bank of Canada officials increased the pace of interest rate cuts in October to boost economic growth as price pressures eased.

Since that meeting, a series of economic data has not made a clear case for a 50-point cut. Inflation rebounded to 2% last month, and while the economy and labor market remain soft, there are signs that falling prices are starting to boost consumer spending and housing. Some economists see policymakers pulling back on a 25 basis point cut next month.

On a per capita basis, while GDP contracted for the sixth quarter in a row, household spending rose after falling in six quarters over the past two years.

Article content

Government spending also increased, with spending at all levels of government increasing.

“Nothing in this report would change our view that the Bank of Canada will cut its policy rate by 25 basis points in December,” said Charles St-Arnaud, economist at Alberta Central, in an email.

“However, the weakness of business investment, especially machinery and equipment, can indicate a lack of business confidence. Similarly, the lack of growth on the export side suggests that Canada is having difficulty leveraging US power. “

Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce, said the data supported a 50 basis point cut at the December meeting.

“Despite the positive historical updates and better fundamentals among the third quarter data, today’s GDP figures point to a weaker recent trend than the Bank of Canada expected,” he said.

Statistics Canada will report November jobs numbers next Friday, which will be important in determining the size of the central bank’s rate cut, Grantham added.

Article content

“There is no convincing argument in the data as to why the Bank of Canada should not continue to hike to 50 basis points in December,” said Kyle Chapman, FX market analyst at the Ballinger Group, in a note to investors.

“Although it cannot be guaranteed to be ‘neutral’, the faster prices are, the better,” he said.

Both central bankers and economists see the economy strengthening in these areas ahead, although the upcoming sales tax holiday and potential US tax cuts and tariffs could change the path of growth.

In October, growth in the real estate, transportation and retail sectors was partially offset by declines in construction and mining and oil and gas. In September, gains were led by wholesale and retail trade.

—Courtesy of Jay Zhao-Murray and Carter Johnson.

(Add the economist’s response from section 12.)

Article content