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Economic Growth Remains Sluggish

Canadian Economics

By: Viktor Cicman

  • Real gross domestic product (GDP) was essentially unchanged in August, following a 0.1 per cent increase in July. The services-producing industries edged up 0.1 per cent in August, whereas the goods-producing industries declined by 0.4 per cent. A preliminary estimate of 0.3 per cent growth in September means Statistics Canada estimates the economy grew by 1 per cent in the third quarter.
  • The manufacturing sector led declines in August. Both durable goods and non-durable goods manufacturing contributing to the drop in output, as the overall sector fell by 1.2 per cent. Durable goods manufacturing continued the downward trend that began in the summer of 2023, as high interest rates continue to weigh on big purchases. In August specifically, retooling and maintenance activities occurring at multiple auto plants and were a large contributor to the decline.
  • Work stoppages at Canada’s two main rail carriers led to decreases in transportation and warehousing sector. Transportation and warehousing contracted for the second consecutive month, falling 0.3 per cent in August. This is the second month in a row that the sector experienced bad news, as output in July partially because of the Jasper wildfires that halted some rail freight movements to and from key ports on the British Columbia coast.
  • The finance and insurance sector has had a good momentum recently as the sector has expanded three months in a row. In August, the sector will expand by 0.5 per cent with financial investment services, funds and other financial vehicles was the main driver of growth during those three months. Higher than usual trading activity on equity and fixed-income markets drove the increase in August.
  • The public sector continues its robust growth in 2024. The sector aggregate (comprising educational services, health care and social assistance, and public administration) increased for the eighth consecutive month, and was up 0.2 per cent in August. Public administration contributed the most to growth in August, as for a fourth month in a row, local, municipal and regional public administration was the largest contributor to the public administration sub-sector.

Insights

Today’s release of GDP estimates continue to highlight that Canada’s economy is moving towards a soft landing as interest rates continue to fall. The economy continues to grow, although only modestly, with the release suggesting GDP was up 1 per cent in the third quarter. Underlying weakness remains in the economy, with the labor force participation rate having dropped to 64.9 per cent in September, marking its third decline in four months, while the unemployment rate reached 6.5 per cent in September almost 1 per cent higher than last September. In addition, the Index of Business Confidence remains low, as only 23.1 per cent indicate that now is a good time to invest, showing a long-standing stretch of investment ambiguity. A major concern for the countries slowing productivity and declining business investments since the pandemic of 2020.

On a positive note, the economy is expected to avoid a recession and continue growing in the latter half of the year. Inflation now seems entrenched at a range the Bank of Canada is comfortable with, which contributed to the half-point decrease in interest rates by the Bank of Canada this month. However, average hourly wages saw a year-over-year increase of 4.6 per cent in September, following a 5.0 per cent rise in August, and service inflation continues to pose a challenge for the Bank of Canada in fully controlling consumer prices. The Bank however believes that with overall inflation falling within the target range of 1 to 3 per cent, a weakening economy poses a greater risk of falling behind and allowing consumer price growth to slow too much. Rate cuts are likely to continue, which will help stimulate consumer spending next year and momentum to gain footing into 2025.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit our Canadian Outlook.

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