Another Flat Reading for GDP Proves Economy Has Eased

Canadian Economics

  • Real gross domestic product (GDP) in August was essentially unchanged for the second straight month. Statistics Canada’s preliminary estimate is showing a flat reading again for September, indicating no economic growth in the third quarter.
  • In August, output declined in 12 out of 20 industries. Among goods-producing sectors, the largest drop was in Agriculture, forestry, fishing and hunting, which contracted by 3.2 per cent for the month, mostly because of dry conditions in Western Canada. Manufacturing industries also saw large declines for the third straight month. A silver lining is that transportation equipment manufacturing posted its fourth increase in five months as issues related to chip shortages continued to ease.
  • Services output rose by 0.1 per cent. Wholesale trade had the biggest gain, increasing by 3.2 per cent in August. The machinery, equipment and supplies subsector led growth within Wholesale trade, posting a 5.1 per cent gain. Accommodation and food services, however, dropped by 1.8 per cent in August, likely because interest rates are challenging household budgets. Activities at outdoor recreational sites continued to be limited by the presence of wildfires in parts of the country and the industry is still reeling from the declines recorded in May and June.
  • The mining, quarrying, and oil and gas extraction sector rose 1.2 per cent in August. Gains over the last three months more than offset the sharp decline in May, which was attributed to the impact of forest fires on natural gas extraction in Alberta. Notably, the oil and gas extraction subsector is up for the seventh time in the last eight months, bringing activity to its highest level since April 2019.

Key Insights

After another month of no growth and advanced estimates showing the same in September, it is clear that Canada’s economy has come to a standstill. Two consecutive quarters of negative or minimal growth suggest that the economy is feeling the impact of historically high interest rates. There’s some good news that September’s inflation data showed consumer prices decelerated from the previous month including core inflation measures, although inflation remains stubbornly high. These indicators helped the Bank of Canada hold interest rates for October. However, they did indicate that door is left open to more increases if core inflation doesn’t continue a downward trend, and labour markets continue to surprise.

Internationally, a pressing concern on everyone’s mind is the Middle East conflict. It remains challenging to predict the full extent of the impact on financial markets, given the evolving nature of the conflict. Factors such as higher oil prices and disruptions in supply chains could affect short-term consumer prices. On the other hand, Canada’s two biggest trading partners have recently had positive data releases. In China, recent GDP figures indicate that the worst of its post-pandemic economic downturn might be behind as consumer-driven growth fuels a recovery. In the United States, recent retail sales data exceeded many forecasts, and industrial production has strengthened, indicating an economy that continues to grow. Both factors will bolster Canada’s export markets, providing support for the economy during this period of slowing growth.

Looking at Canada’s economy over the medium term it appears that higher borrowing costs may be here to stay. While interest rates will move lower from their peaks now, it’s unlikely that we will return to pre-pandemic rates in the foreseeable future. Factors that drove interest rates lower for more than a decade before the pandemic are now reversing. Key drivers include a reverse in the global savings rate from shifting demographics and China’s shrinking trade surpluses, rising productivity gains from artificial intelligence, and broader investments in climate change all point to a world where interest rates will remain higher. What this means is that consumers, businesses, and governments would all face higher borrowing costs. Perhaps the biggest shift would come from governments, who have become accustomed to lower rates as debt levels reach near record highs across the developed world. Governments, who already face long-term challenges to their finances from demographics, will especially struggle with the new burden of higher interest rates.

People walking across bridge to shopping mall, Toronto, Canada

For additional research on GDP in Canada, please visit our research series, GrowthNow. GrowthNow utilizes current or recent economic data to estimate the GDP growth rate for the current quarter before official figures are published.