Canada’s economy grew faster than expected in the third quarter, but shows signs of slowing dramatically

The Canadian economy grew faster than expected in the third quarter, but there are already signs of a dramatic slowdown, raising questions about the extent of the Bank of Canada’s interest rate hike this week. next.

Statistics Canada reported on Tuesday that Canada’s gross domestic product grew at an annualized rate of 2.9% in the quarter, almost twice as fast as economists polled by Bloomberg expected. Their consensus estimate was 1.5%.

But preliminary October data released by Statistics Canada at the same time showed the economy did not grow at all that month. This could give the Bank of Canada a reason to reverse its rate hike campaign, argued Pedro Antunes, chief economist at the Conference Board of Canada.

« I would say there’s enough data here to suggest that a wait-and-see attitude would be a reasonable policy approach, » Antunes said. “If I was governor, I think I would push for a quarter-point hike and then pause rate hikes.”

The mixed news also helped push the loonie lower against the US dollar. In the late afternoon, the loonie lost more than half a cent to 73.60 cents (US)

Jim Stanford, an economist at the Center for Future Work, expects the Bank to raise its key overnight rate by 25 basis points (a quarter of a percentage point) next Wednesday, although it will help tip the Canadian economy into a « painful » recession.

« They have made it clear that they are focused on inflation and that they will do whatever it takes to bring it down to 2%. This means they will continue to tighten even if the economy slows down. For this reason, the coming recession will be painful as the Bank presses the brakes even as the economy loses momentum,” Stanford said.

The Bank has raised its overnight rate six times this year as it strives to control inflation. In October, the consumer price index — a broad gauge of inflation — was 6.9% higher than a year earlier.

Antunes says there’s evidence that a two-pronged approach to fighting inflation is starting to work.

“The first is you scare consumers, tell them interest rates are going up forever, scare them into compliance. .. On the other hand, some of these supply chain constraints may have eased as we build up inventory, and that’s a good sign for inflation,” Antunes said, noting that Statistics Canada found that inventories rose significantly for the second consecutive quarter. .

« At the wholesale level, at the manufacturing level, all the way through the economy, we’re seeing supply build up, » Antunes said.

October’s flat GDP shows we’re probably already in a recession, Stanford suggested. And while rising inventories may be a sign that supply chain issues, which have plagued the economy during COVID, are easing, there is also a gloomier interpretation, he said. supported.

« Usually inventories rise when sales are weaker than companies expect, » Stanford said.

This shows that the Bank of Canada’s rate hikes are already having a significant impact on the ability of Canadian households to spend money, Stanford said.

The October data is still preliminary, warned BMO chief economist Douglas Porter. And the most recent preliminary data has subsequently been revised upwards, he pointed out. This means that the picture painted by the statistics is of an economy growing at a faster rate than expected.

« With all the revisions and a stronger than expected third quarter, the economy is operating at a higher level than any of us had previously believed, including the Bank of Canada, » Porter said. « I don’t think there’s much relief here for the rate outlook. »

Still, Porter notes, BMO’s official forecast is that the Canadian economy will slip into recession, shrinking slightly in each of the next two quarters. A shallow recession is more likely than a deep recession, Porter argues.

« I have to say that the North American economy has been resilient over the past few months, and this third quarter confirms that point, » Porter said.

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