Canada’s economy unexpectedly shrinks 1.1% in Q3 but skirts recession

THE Canadian economy unexpectedly contracted at an annualised rate of 1.1 per cent in the third quarter, data showed on Thursday (Nov 30), avoiding a recession but showing growth stumbling ahead of next week’s interest-rate decision.

The third-quarter reading came in below the 0.2 per cent gross domestic product (GDP) increase forecast by analysts in a Reuters poll, and below the Bank of Canada’s (BoC) 0.8 per cent projected gain.

The economy avoided slipping into a technical recession – defined as two consecutive quarter-on-quarter contractions – because second-quarter GDP data was revised to 1.4 per cent growth from an initial report of a 0.2 per cent decline, Statistics Canada said.

“I think the big picture here is the economy is struggling to grow but it is keeping its head just above recession,” said Doug Porter, chief economist at BMO Capital Markets. “I would almost say it’s swimming upstream.”

Real GDP most likely edged up 0.2 per cent in October after a 0.1 per cent gain in September, Statscan said.

The Canadian dollar was trading 0.2 per cent lower at 1.3620 to the US dollar, or 73.42 US cents, as the greenback notched gains against a basket of major currencies.

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The BoC expects economic growth to remain muted for the next few quarters before picking up at the end of 2024. governor Tiff Macklem last week said interest rates might be at their peak, given that excess demand has vanished and weak growth is expected to persist for many months.

Combined with recent easing in inflation and jobs data, the third-quarter contraction suggests that the BoC will keep rates on hold at its next announcement on Dec 6.

The BoC has remained on the sidelines since July after lifting its benchmark interest rate to a 22-year high of 5 per cent. Money markets now expect a rate cut as soon as March.

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“If you look at the data in aggregate for the Bank, what this means is that conditions are tight enough for now,” said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

A decrease in exports and slower inventory accumulation weighed on the economy in the third quarter and were partially offset by increases in government spending and housing investment, Statscan said, noting that new housing construction increased for the first time since early 2022.

The month-over-month GDP gain in September, led by goods-producing industries, exceeded analysts’ zero growth forecast.

In an advance estimate for October, Statscan said increases in mining, quarrying, and oil and gas extraction, retail trade, and construction sectors were partially offset by decreases in the wholesale trade sector. REUTERS