- Despite an increase of 0.1 per cent in September, Canada’s economy shrank by 1.1 per cent on an annualized basis in the third quarter, a sign that interest rates taking steam out of Canada’s economy.
- In September, output rose in only 8 of 20 industrial sectors. On the goods side, the manufacturing sector increased 0.9 per cent in September, after contracting for three months in a row, as both durable and non-durable manufacturing grew. The construction sector rose by 1.0 per cent in September behind a good performance from residential building construction, which increased by 3.8 per cent in September, the largest monthly gain since April 2021.
- Meanwhile, across the services industries there was little change in the aggregate. The largest increase came from wholesale trade, with it rising by 0.5 per cent in September, as six of nine subsectors grew. Motor vehicle and parts wholesalers drove the increase in the month. Finance and insurance contracted for the third time in four months, down 0.3 per cent in September. In addition, arts, entertainment and recreation fell for the third time in four months, weighed down by less activity.
- A weak export performance was a key reason for the decline in the third quarter, highlighting the challenges the global environment presents. Exports of goods and services fell 1.3 per cent in the third quarter with most of the decline coming from refined petroleum energy products, dropping a staggering 25.4 per cent in the third quarter.
- Household spending also continues to be sluggish, despite generally strong population growth. Household consumption was flat in the third quarter, following a nearly flat reading in the second quarter. A slowdown in consumption indicates households are now translating higher interest rates decisions to hold back on spending. With our own consumer confidence survey indicating confidence is near a record low in November, households are likely to keep spending down as best they can heading into the new year.
- A silver lining in this quarters report is that compensation of employees rose 1.3 per cent on a nominal basis in the third quarter of 2023, as average earnings and employment increased. In addition, household net saving increased in the third quarter, as a modest gain in household disposable income surpassed the rise in household spending – clear sign that households are being more careful with spending decisions. Higher government transfers, from the Grocery Rebate in July helped offset softening labour market conditions and weaker financial market gains.
Canada’s economy has now seen little growth in the economy over the last six months, now declining by 0.3 per cent in the third quarter. Households are tapped out from high interest rates and persistent inflation. Consumer spending remained weak in the third quarter, marking two quarters of limited growth. Furthermore, the labor market is showing signs of easing as employment growth has slowed in recent months, contributing to an uptick in the unemployment rate. All this points to an economy that will remain weak for remainder of the year and the beginning of 2024.
However, a slowing economy aligns with the Bank of Canada’s objectives. Bank of Canada governor Tiff Macklem recently stated that the interest rate hikes which started last year may have been enough to tame consumer price growth, with inflation showing a persistent downward trend and falling to 3.1 per cent in October. Macklem believes the economy is approaching a balance, with excess demand being curtailed. This reduces pressure to increase rates, although there remains uncertainty with the possibility of at least one more rate hike. Encouragingly, by 2024, consumer inflation is expected to continue its downward trend, and interest rates will likely start to decrease from their peaks, contributing to a potential bounce back in the Canadian economy later in the year.