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Shoppers at Toronto's Eaton Centre are seen in this file photo.Fred Lum/the Globe and Mail

The Canadian economy tumbled over the summer as export shipments waned and consumer spending flattened, signs of a continuing malaise as the country grapples with higher interest rates – and a sharp contrast with robust growth in the United States.

Real gross domestic product, which is adjusted for inflation, shrank at an annualized pace of 1.1 per cent in the third quarter, according to figures published by Statistics Canada on Thursday. The results were considerably weaker than the Bank of Canada’s estimate of 0.8-per-cent growth and Bay Street’s expectations of a slim 0.1-per-cent increase.

Canada’s economic performance has increasingly diverged from that of the U.S., which posted a 5.2-per-cent expansion in the third quarter.

Canada did, however, avoid two consecutive quarters of GDP decline – what some economists refer to as a “technical recession.” Statscan made sharp upward revisions to its second-quarter figures, which are now showing annualized growth of 1.4 per cent, where previously they showed a slight decline.

“I think this is a very challenging, very volatile time in the global economy,” Finance Minister Chrystia Freeland told reporters at an event in Vancouver on Thursday. “But what I am very confident of is there is no country in the world that is better positioned to achieve that soft landing than Canada.”

Explainer: Is Canada in a recession? Who makes that determination?

Conservative Leader Pierre Poilievre questioned why Canada’s economy is shrinking at a time when the U.S. economy is posting strong growth numbers.

“This is the result of high taxes, big deficits and crippling red tape,” he said during Question Period. “The economy is now smaller than it was on a per capita basis five years ago.”

Thursday’s report showed how higher borrowing costs are weighing on economic activity, although the summer months were also affected by wildfires and more striking workers than usual.

In a preliminary estimate, Statscan said that GDP rose 0.2 per cent in October, and many analysts project growth will swing back into positive territory in the fourth quarter.

Still, the economic situation looks more grim when soaring population growth is accounted for. GDP per capita – a popular measure of living standards – has fallen for five consecutive quarters.

“There are plenty of unexpected cross currents in today’s release, but the big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters,” Bank of Montreal chief economist Doug Porter said in a research note.

The Statscan report did not have a material impact on expectations for the Bank of Canada, which has pushed interest rates into restrictive territory. The bank has signalled that its hiking cycle could be finished. The consensus among economists and traders is that the BoC will start to lower interest rates by the middle of next year.

The GDP figures showed several areas of weakness. Business investment fell at an annualized rate of 10.1 per cent in the third quarter, while exports shrank by 5.1 per cent. Statscan noted that inventories accumulated at the slowest pace in two years. Household spending was essentially flat for a second consecutive quarter.

The household savings rate picked up to 5.1 per cent in the third quarter from 4.7 per cent in the second quarter. Canadians have been squirrelling away more money than usual; the average savings rate between 2015 and 2019 was 2.2 per cent. These figures are aggregated across all households, and savings rates tend to be greater among higher-income households, Statscan noted.

Despite the broad-based weakness, there were some areas of expansion. Government spending rose by 7.3 per cent annualized during the third quarter, which saw Ottawa send a “grocery rebate” to millions of households.

Higher government spending is “perhaps not where you want to see the growth,” Mr. Porter said.

Investments in residential housing jumped at an annualized rate of 8.3 per cent in the third quarter, the first increase since early in 2022. This was driven by a sharp increase in new construction, offsetting the drag from weaker homebuying activity as higher mortgage costs put a chill on the resale market.

Final domestic demand – a metric that includes household and government consumption, along with capital investments – rose at an annualized pace of 1.3 per cent, similar to growth in the second quarter.

This is “among the things I watch beneath GDP numbers for signs of a genuine downturn in the domestic economy, and that’s not happening here,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, said in a note.

Canada is widely considered by economists to be especially sensitive to rising interest rates, because the average household is highly indebted and many families are facing the prospect of steeper costs when their mortgages renew in the coming years. The Bank of Canada has increased its benchmark rate to 5 per cent from emergency lows of 0.25 per cent in early 2022 – the quickest pace of tightening in decades.

However, Bank of Canada Governor Tiff Macklem said last week that borrowing costs may be high enough to bring inflation under control. In recent weeks, economists and traders have speculated over the timing of potential rate cuts. Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a quarter-point rate cut by April, 2024. A week ago, traders were expecting a cut by June.

Even so, the economic outlook is subdued. The federal government’s recent fall economic statement included an estimate of 0.4-per-cent growth in real GDP in 2024, based on a survey of private-sector economists.

With a report from Bill Curry

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