The autumn skies turned gloomy for the Canadian economy, as third-quarter expansion slowed to a crawl and the outlook for growth in the coming months remains lacklustre.
In the three months ending Sept. 30, gross domestic product grew at an annual rate of 0.6 per cent, Statistics Canada reported Friday, less than what economists had expected, and substantially below the Bank of Canada's earlier forecasts of 1 per cent. It was also a decline from the previous quarter's growth of 1.7 per cent.
In the month of September alone, GDP was flat, indicating that the fourth quarter is likely to start with a whimper as well.
The big dent in the third quarter came from exports, which were down 7.8 per cent, the biggest decline in more than three years. But business investment was off substantially too, suggesting that companies are leery of spending their money in light of weakened markets at home and abroad.
Residential housing construction also slumped, falling 4.4 per cent. Tougher mortgage rules clearly aren't helping a housing market that was already poised for a pause.
If there was a silver lining in the GDP numbers, it was that consumer spending was up sharply in the quarter – it rose by almost 4 per cent – an indication that individual Canadians are feeling a little more free with their money than business leaders.
But don't expect consumers to remain in a buying mood over the long term, said Benjamin Reitzes, senior economist at BMO Nesbitt Burns. "Unfortunately, consumers are burdened with a high debt load and have been berated over the past few years to slow down their spending," he said. "With housing slowing at the same time, that pace of growth is probably not sustainable."
The Canadian GDP number was a big contrast to the U.S., where the economy grew 2.7 per cent in the third quarter. Shouldn't that expansion south of the border help to buoy Canada's economy? Don't count on it, Mr. Reitzes said. "Actually a lot of the growth in the U.S. is driven by inventories and federal defence spending," he said. "If you take those out, the U.S. numbers are meaningfully weaker … Things aren't going that well in the U.S. either."
In addition, he noted, Canada has to deal with a sustained high dollar, another factor which has hurt our exports.
While the uncertainty of the U.S. election is out of the way, the looming "fiscal cliff" has taken its place as the big worry on the North American economic front. If things go badly with negotiations to avoid the cliff, Canada will certainly be affected. At the same time, Europe's financial crisis has not been resolved, and that is a further drag on domestic expansion in this country.
"The third quarter was a reminder that no country is an island in a globalized world," Toronto-Dominion Bank economist Diana Petramala said. That is particularly true in Canada, where exports and the resource sector are so crucial, she said.
Ms. Petramala predicted that over the short term, economic growth in Canada is likely to be stuck in the range of 1.5 to 2 per cent. By the second half of 2013, however, "some of the economic headwinds should abate, particularly as we move past the fiscal cliff deadlines," she said, with Canada's GDP likely to shift to the range of 2 per cent to 2.5 per cent. In the meantime, however, "we are looking at very tepid global economic growth," and Canada can't help but feel the impact, she said.
One key question mark is how the weak GDP numbers will affect the policies of the Bank of Canada, which has projected fourth-quarter growth of around 2.5 per cent – an estimate that most economists now view as wildly optimistic. There is likely to be little change in policy at the central bank's rate setting Tuesday, economists say, but the bank's next monetary policy report, to be released in January, may show some shift in direction. Some economists think there is a slight chance the bank could shift its "bias" from leaning toward a slight rate increase next year toward a hint of a rate decrease that would stimulate the economy further.