Economy Posts Marginal Gains in November

Canadian Economics

By: Liam Daly

  • Real gross domestic product rose by 0.1 per cent in November, matching the growth rate of the previous month. According to Statistics Canada’s preliminary estimate, the economy was effectively unchanged in December. If accurate, real GDP would have grown by 3.8 per cent in 2022.
  • Among the goods-producing industries, gains in utilities and mining, quarrying, and oil and gas extraction were more than offset by lower output in the construction industry, which contracted by 0.7 per cent. The fall in construction activity was broad-based, with the most significant contraction occurring in the residential and repair construction subsegments. Manufacturing output inched down by 0.1 per cent to reach the lowest level since December 2021. This was due to lower output in the non-durable manufacturing subsegment.
  • Among the services, total output rose by 0.2 per cent. Notable growth was recorded in transportation and warehousing, largely due to increased air transportation services, which reached the highest level since the onset of the pandemic. Meanwhile, after three consecutive months of growth, output in the accommodation and food services sector fell by 1.4 per cent. Retail trade contracted by 0.6 per cent as purchases of food and beverages, which posted strong price growth in November, declined.
  • Public services recorded a seventh consecutive month of growth due to higher output in public administration, healthcare and social services. Output in the educational services sector remained effectively unchanged.

Key Insights

Following last week’s quarter-point rate hike, the Bank of Canada has signalled plans to hold off on further rises pending further assessment. Inflation is declining and is forecast to fall sharply in the first half of 2023. The Canadian labour market continues to outperform expectations, posting solid employment growth in December. Ongoing job creation is helping to ease supply-side inflationary pressure. Meanwhile, lower housing construction activity and a slowdown in manufacturing and retail trade suggest that demand is moderating. Mission accomplished remains a way off but achieving the long-fabled soft-landing appears increasingly feasible.

The Canadian dollar recently rose to its highest level in over two months against the U.S. dollar. Indications from the Bank of Canada that interest rate cuts won’t happen anytime soon have drawn capital to Canada from international investors searching for higher returns. This inflow of capital bids up demand for the Canadian currency, causing it to strengthen. At the same time, a stronger-than-expected U.S. economy has been perceived as a positive sign for Canadian exports, adding further strength to the loonie. For Canadian importers, a stronger currency increases purchasing power and is disinflationary—a welcome effect in the current climate.

With prices and borrowing costs rising sharply in recent quarters, many households and businesses are facing growing financial pressure. According to the Office of the Superintendent of Bankruptcy, total insolvencies in November hit a 32-month high. Faced with higher debt interest payments, some households will be forced to cut back on discretionary spending to the detriment of the broader economy. Canada’s low unemployment rate bodes well for future incomes, and savings accumulated during the pandemic will continue to offer some cushion against rising debt costs. However, the era of low-interest debt is over, and many households will be forced to tighten their purse strings in the year ahead.