Canada’s GDP sinks in third quarter of 2023

• The Canadian economy contracted by 1.06% quarter/quarter annualized (q/q) in 2023 Q3, while Q2 was revised higher (+1.4% q/q from -0.2%). Furthermore, the flash estimate for October showed a +0.2% monthly increase. Stripping out external factors, final domestic demand came in at a robust 1.3% q/q, right on our expectation for positive, but still below trend growth.
• International trade weighed on growth, with exports of goods and services falling 5.1% q/q. The biggest drag was “refined petroleum energy products, which dropped 25.4%”. Imports were also down on the quarter by 0.6%, driven broadly by “declines in clothing, footwear and textile products, transportation services, and electronic and electrical equipment and parts”.
• Housing was a positive contributor to growth, +8% q/q, bucking the trend of five straight quarterly declines. New construction of apartments was more than enough to offset the negative force coming from resale activity.
• Consumer spending came in flat at +0.1% q/q. While durable goods spending (+4% q/q) was supported by purchases of new trucks, vans and sport utility vehicles, spending on non- and semi-durable goods contracted in the quarter (-1.6% and -10.8% q/q). Strong employment gains were maintained, boosting incomes more than spending. This caused the savings rate to rise to 5.1% from 4.7%.
• Business investment came in at -10.1% q/q, as the near completion of the Kitimat liquified natural gas project resulted in less spending on structures, while spending on machinery and equipment fell on lower spending on aircraft and other transportation equipment (usually very volatile).

Key Implications

• Well, it’s not a technical recession, but it’s not good either. While the Canadian economy contracted more than expected in the third quarter, the upward revision to Q2 and the positive flash estimate for October should ease some recession concerns. Plus, when we strip out external factors related to trade, the Canadian economy grew at much better +1.3% q/q pace. Collectively, this points to a positive but still weak forecast of around +0.7% q/q for the fourth quarter.
• There is no reason for the Bank of Canada to hike again. When the BoC decided to hike in June and July it was because Q1 2023 growth was surging alongside a recoil in housing demand. But that was short-lived, with spending, employment gains, and overall inflation easing ever since. We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the 2% target. This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.