Canada’s Economic Growth Takes a Significant Slowdown, Paving the Way for…

Canada’s economic growth eased to a 1% annualized rate in the third quarter, marking a slowdown from 2.2% annualized growth in the previous quarter.

The weak gross domestic product report raises the likelihood that the Bank of Canada might deliver a more substantial rate cut at its Dec. 11 announcement, economists say. With annual inflation now comfortably at the Bank of Canada’s 2% target, policymakers have room to act aggressively to stimulate the economy.

Bank of Canada has slashed overnight interest rates four times this year, including a 50-basis-point cut in October, lowering the policy rate from a peak of 5% last year to 3.75% currently.

While the third-quarter GDP rate is in line with market forecast, it has fallen short of the Bank of Canada forecast of 1.5% growth for the period, as stronger household and government spending was offset by weaker business investment, according to the latest Statistic Canada report.

A number of analysts suggest that today’s disappointing GDP figures may tip the scales toward a larger 50 basis point rate reduction, although next week’s employment figures are still likely key to a final determination.

The following is commentary issues by economists in notes to clients in response to the third quarter GDP report:

Nathan Janzen, assistant chief economist, Royal Bank of Canada

Some interest rate sensitive sectors such as residential investment and consumer spending showed signs of life in Q3 following the start of the Bank of Canada interest rate cuts in June. But per-capita GDP was still down for a sixth consecutive quarter, and with soft growth momentum extending into monthly estimates into early Q4.

The GDP numbers should help to reinforce that interest rates are higher than they need to be to maintain inflation sustainably at a 2% rate. The Bank of Canada will also be watching next week’s labor market data closely, but our own base-case assumption is for another 50-basis-point cut to the overnight rate in December.

Andrew Grantham, senior economist at CIBC Economics

Growth in the Canadian economy slowed in Q3, and a weaker than expected end to the quarter suggests growth may not pick up as much as the Bank of Canada expects in Q4.

Monthly data suggested that the economy ended the quarter on a weaker note than anticipated, with the 0.1% increase in September two ticks below the consensus forecast and the advance estimate (of 0.3%).

Despite the positive historic revisions and better underlying detail within the Q3 data, today’s GDP figures point to a weaker recent trend in activity than the Bank of Canada was expecting and is supportive of a 50-basis-point cut at the December meeting, although next week’s employment figures are still likely more important in making a final determination.

Stephen Brown, deputy chief North America economist at Capital Economics

The 1.0% annualized gain in third-quarter GDP was not as bad as it looks, with most of the weakness due to a big drag from the volatile inventories component and the Bank of Canada likely to be encouraged by the sharp acceleration in consumption growth.

Nonetheless, the downgrade to monthly GDP in September and latest preliminary estimate of another muted gain in October leave fourth-quarter GDP growth on track to be weaker than the Bank expected, meaning we are back to being closer to 50/50 in terms of a 25bp or 50bp cut from the Bank next month.

The key takeaway for the Bank from this release is probably that the 3.6% gain in consumption was twice as strong as the 1.75% rise the Bank was expecting. Nonetheless, the Bank will still be concerned by the downgrade in monthly GDP growth to just 0.1% in September, from the initially reported 0.3% gain, as well as the latest preliminary estimate implying that GDP rose by just 0.1% again in October.

That raises the chance of another 50-basis-point cut from the Bank in December. Given the recent upswing in home sales, core price growth and most of the key monthly consumer and business surveys, however, as well as the mini-fiscal stimulus announced by the government, we’re inclined to stick with our recently revised call for a smaller 25bp move. That view will be harder to defend if the last key data release before the Bank’s decision, the November Labor Force Survey released next week, is also weaker than we expect.

Douglas Porter, CFA, chief economist at BMO Capital Markets Economics

Canadian real GDP rose at a meagre 1.0% annual rate in Q3, landing close to heavily marked-down expectations. Recall that, back in July, the Bank of Canada had initially forecast 2.8% growth in the quarter, but then scaled that back to 1.5% in its October MPR. The monthly results don’t point to a fast comeback, as September is now estimated at a mild +0.1% [versus preliminary estimate of +0.3%], and October’s [estimate] is also pegged at +0.1%. While we suspect the latter is an underestimate, the economy will struggle to pick back up to a 2% pace in Q4—which is where it was in the first half of the year and marks the Bank of Canada’s latest estimate for the quarter.

There is no debate that the economy struggled through mid-summer and the early fall, weighed on by a variety of labor actions and some weather events. However, there are signs in both the quarterly and monthly data that domestic demand is stirring, with the Bank of Canada rate cuts and some incoming mild tax relief likely to provide additional support for spending. Of course, that somewhat sunnier domestic outlook is looking up at the dark cloud of trade uncertainty; for now we are calling for 2.0% annual GDP growth in 2025, assuming the threatened 25% tariffs [proposed by US president-elect Donald Trump] are not put in place. For the Bank of Canada, we don’t see enough here to push the Bank to cut aggressively again in December—especially in light of the hefty upward revisions, even to this year. We’re still in the 25 bp camp.

TD Economics

Canadian economic growth came in as expected in 2024 Q3. And even though the headline print doesn’t look encouraging, the underlying fundamentals remain strong. The lifeblood of the economy is the Canadian consumer, and they have been carrying the weight over 2024. As interest rates continue to fall alongside a wave of government stimulus over the coming months, we are looking for consumer spending to keep lifting GDP through at least the first half of 2025.

The Bank of Canada is set to meet in two weeks and debate over a 25 vs a 50 bp cut remains hot. Recall that the Bank of Canada cut by 50 basis points in October because inflation fell too far below its 2% target while downside risks to the economy were mounting. Since then, inflation has quickly reversed course and there is greater momentum emerging with the Canadian consumer. Jobs data continues to support spending and the real estate market is starting to recoil after being suppressed under high rates. Even though GDP came in below the Bank of Canada’s forecast for Q3, the momentum in the economy should be sufficient evidence for the BoC to scale back the pace of cuts come Dec. 11.”

Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets

It looks like the Canadian economy took a summer holiday and that stagnation continued into the fall semester. Third quarter GDP posted a meagre 1.0% annualized growth rate, roughly in line with consensus but below the Bank of Canada’s 1.5% forecast. While StatCan chalks much of that up to a reduction in expenditures on aircrafts which can be lumpy, the trend in business investment is hardly inspiring. The overhang from [US] President-elect Trump’s [25%] tariff threat will only worsen the outlook for investment in Canada, as uncertainty about access to the US market weighs on capital spending.

The disappointment in the latest growth readings puts a 50-basis-point rate cut back on the table next month. But after taking into account the revised output gap, we still believe central bankers will opt for a more standard 25 basis point move, particularly with the currency already trading at weak levels.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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