It’s easy to excuse the occasional weak blip in the monthly economic data, especially when wishful thinking leads you to go looking for transitory distortions and rational explanations. But even with its asterisks, Canada’s November downturn in gross domestic product bears the mark of an economy in a legitimate funk.
Statistics Canada reported Thursday that real GDP fell 0.1 per cent month-over-month – the second time in three months that the economy has outright contracted.
Sandwiched in between was October’s strong 0.3-per-cent gain – which raises the question of just how seriously we should take the soft readings on either side of it. It’s not unusual for the economy to take an occasional short breather – especially after the strong run that the Canadian economy had in the second and third quarters.
And indeed, there were temporary and industry-specific factors to explain a good part of the November weakness. The slumping Canadian oil market weighed on both resource extraction and manufacturing (through a drop in refinery output), but oil is just one sector of the economy. The Canada Post strike bogged down transportation’s contribution to growth, as well as weighing on commerce more generally, but that dispute ended in late November. Over all, 13 of 20 industry segments posted gains in the month.
But when you find yourself sifting through the rubble of mediocre economic reports looking for something more solid beneath the surface – as has become the norm lately for Canadian economy watchers – it’s time to start checking the foundation for cracks. And there are several.
The mining and oil-and-gas segment has declined for three straight months, largely reflecting the oil slump, but that’s hardly the only source of weakness. The construction component is on a six-month losing streak. Retail trade is down in five of the past six months. Manufacturing has fallen in three of the past four months.
When you look at the monthly GDP figures going back to August, it’s clear that the strength in October was the anomaly; the broader trend has been somewhere between sluggish and stagnant.
The November weakness means a marked fourth-quarter slowdown is now a given; economists have pencilled in growth at about 1 per cent annualized, half of the third-quarter pace, and the slowest quarter in two and a half years.
With the horizon not looking any brighter, economists have already pretty much given up on the first quarter, too. They note that the slump in the oil sector – by far the biggest cloud hanging over the Canadian economy – had barely even surfaced in the November data; the big hit will come starting in January, when Alberta’s government-imposed production cuts came into effect. We’ll be lucky if first-quarter growth even matches the fourth quarter’s tepid pace; the Bank of Canada’s most recent projection was for 0.8 per cent annualized.
Still, some economists are holding out hope that the economy will shake off its slow start to find a respectable, if unspectacular, pace in 2019. One cause for optimism is the Alberta government’s announcement Wednesday that it would scale back its mandated oil production cuts starting in February, at least two months earlier than previously expected. That has immediately raised hopes that the slowdown in the energy sector could be less severe and shorter-lived than feared, and that the path is already clearing for the economy to bounce back.
The Bank of Canada certainly appears to be in this camp. In a speech in Toronto just hours after the GDP report, senior deputy governor Carolyn Wilkins – the central bank’s second-in-command – characterized the recent slowdown as a “detour,” and expressed confidence that the economic expansion would “pick up again” in the second quarter.
Despite this optimism, it would be foolhardy to take it as a given that we’ll emerge from the current slowdown unscathed. The underlying weakness in retail and construction are evidence of an economy in transition away from the consumer as its long-reliable growth driver, and such transitions are rarely smooth. And even assuming Alberta continues to unwind its oil production limits in the coming months, the underlying problems that brought on the enforced slowdown – rising production, inadequate pipeline capacity, softening global demand, unpredictable prices – will continue to hang over the economy for much longer.
Given the Bank of Canada’s loud and frequent insistence that its monetary policy is “data dependent,” we can trust that it will wait for economic numbers confirming its optimistic view before declaring the all-clear for further interest rate increases. This slowdown may prove as transitory as the central bank hopes; but there are also good reasons to caution that it may not be.