Canadian economy shrank in Q3 but manages to 'keep its head above recession waters'

OTTAWA -

The Canadian economy shrank in the third quarter as higher rates weighed on consumer and business spending, but has so far managed to skirt a recession after a significant upward revision to second quarter GDP figures.

Statistics Canada released its gross domestic product report Thursday, which shows the economy contracted 1.1 per cent on an annualized basis.

It also revised up its reading for real gross domestic product in the second quarter, noting the economy did not shrink, but rather grew 1.4 per cent on an annualized basis.

• The latest on inflation in Canada

While the decline in the third quarter was offset by growth in the second quarter, economists reacting to the new data say the trend is clear: the economy is teetering.

"The big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters," wrote BMO chief economist Douglas Porter in a client note.

The federal agency says a decrease in international exports and slower inventory accumulation by businesses were partially offset by increases in government spending and housing investment in the third quarter.

It also reported new housing construction in the quarter increased for the first time since early 2022, led by apartment construction.

Bank of Canada interest rate hikes have been putting pressure on consumer and business spending as they both face higher borrowing costs.

Thursday's report shows consumer spending continues to be flat for a second consecutive quarter.

Households are instead saving more as disposable income surpassed the rise in nominal spending.

The report says government transfers, namely the doubling of the GST rebate in the summer, propped up incomes as the labour market weakened.

Meanwhile, business capital investment fell by two per cent in the third quarter.

TD director of economics James Orlando noted there were one-off factors that affected the economy in the third quarter, such as the B.C. port strike and widespread wildfires.

"Some of the weakness that we got in summertime seems to be bouncing back a little," Orlando said.

Statistics Canada's preliminary estimate for real GDP in October suggests the economy grew 0.2 per cent, following a 0.1 per cent increase in September.

The Bank of Canada has been striving to pull off a soft landing, meaning higher interest rates slow the economy just enough to bring down inflation but not to the point of a recession.

Orlando says Canada appears to be experiencing a soft landing right now as the country averts a sharper downturn.

"If you asked me two years ago, 'How would the Canadian economy respond, given we have high consumer debt loads, and the fact that the Bank of Canada raised interest rates from, like, zero to five per cent' ... most people thought we would've had a serious recession by now. And we haven't," Orlando said.

Canada's inflation rate has fallen from a high of 8.1 per cent in the summer of 2022 to 3.1 per cent in October.

The central bank is set to announce its next interest rate decision on Dec. 6, after choosing to hold its key rate steady at five per cent at its last two announcements.

Economists widely expect the Bank of Canada to remain on hold as inflation slows and the economy weakens.

"Today's mixed report reinforces the point that the Bank is done hiking rates, but doesn't really advance the cause for rate cuts, as the economy isn't showing signs of further deterioration early in Q4," Porter said.

The Bank of Canada has doubled down on its willingness to raise rates further if inflation doesn't come down fast enough and has brushed off any discussion of rate cuts down the line.

Statistics Canada will be releasing its November labour force survey on Friday, which will offer economists more insight on whether economic momentum has continued to slow.

This report by The Canadian Press was first published Nov. 30, 2023.