By Robb M. Stewart
OTTAWA--Canada's economy made a sluggish start to the final months of the year after growth cooled in the third quarter, reigniting debate over whether the central bank may opt for another outsize rate cut in December.
Household spending in the country looks to have responded to earlier reductions in borrowing costs but business investment has weakened and the economy broadly has shifted down a gear. This comes even with rapid immigration-driven population growth, traditionally a boost to economic performance.
Gross domestic product rose at annualized rate of 1% in the July-to-September period, Statistics Canada said Friday. That marked a slowdown from the previous quarter's upwardly revised growth of 2.2% and undershot the roughly 1.5% expansion forecast by the Bank of Canada.
GDP per person, however, contracted for a sixth consecutive quarter as population growth runs at about 2.5% in the second half of the year.
Statistics Canada's preliminary data suggest momentum remained soft heading into the final quarter, with industry-level growth only ticking higher in October from the month before after similarly muted growth in September. That indicates GDP in the fourth-quarter could fall short of the 2% expansion projected by the Bank of Canada.
Canada's economy has grown for four quarters running after stalling the middle of last year, which continues to point toward a soft landing despite the pressures on households and businesses from still-high interest rates. At the same time inflationary pressures have retreated and the labor market has weakened, with the jobless rate steadily edging higher.
The Bank of Canada is open to further interest-rate cuts so long as the economy evolves largely as anticipated, but policymakers have said they want to see growth pick up to avoid interest rates from getting stuck below target.
With the GDP report, markets are again pricing roughly equally the odds for either a back-to-back half percentage point cut to the central bank's policy rate in December or a return to quarter-point moves. Economists expect jobs data due in a week to cement the case either way.
"The GDP numbers should help to reinforce that interest rates are higher than they need to be to maintain inflation sustainably at a 2% rate," said Nathan Janzen, assistance chief economist at Royal Bank of Canada, who continues to look for a half-point cut Dec. 11.
GDP, a broad measure of goods and services produced across the country, was buoyed in the latest quarter by household spending as Canadians bought new trucks, vans and sport utility vehicles, and increased spending on financial services. That more than made up for a fall in money spent on accommodation and food services.
On a per-capita basis, household spending edged up for the quarter after falling in six of the last eight quarters. That could be an indication that some interest rate sensitive sectors have responded to lower borrowing costs after the start of rate cuts in June.
Government spending also continues to drive the economy, with spending up across all levels of government.
Still, business expenditure for the quarter was down, with lower spending on machinery and equipment. Spending on aircraft and other transportation equipment and parts was notably lower, coinciding with a decline in imports of aircraft and ships following a jump in the second quarter.
And while businesses continued to add to nonfarm inventories, the pace of growth slowed from the quarter before with reduced stocks of motor vehicles by dealers and a drawdown in manufacturing goods.
Trade also is pulling on growth. Exports of goods and services from Canada were down 0.3%, a softer drag on growth than the 1.4% drop the quarter before but still outpacing a 0.1% drop in third-quarter imports. Lower exports of unwrought gold, passenger cars and light trucks weighed in the quarter, countering an increase in crude oil shipments.
The Bank of Canada expects the economy will gradually strengthen in 2025 and 2026 despite government measures to cut back on immigration that has the population on track to grow about 2.5% in the second half of this year. A federal tax holiday on certain purchases over the holiday season promises to add temporary stimulus, though are wary of possible headwinds as U.S. President-elect Donald Trump prepares for his return to the White House and threatens tariffs against countries including Canada.
Statistics Canada's early estimate of industry-level accounts suggests GDP in October increased 0.1%. That was based on increases in real estate, transportation and warehousing and retail trade, which was partially offset by declines in construction, mining and oil and gas extraction.
In September, GDP edged up 0.1% from the month before thanks to retail and wholesale trade. That marked a fourth month running where services-producing industries expanded, while goods producers were down for a second month in a row with weakness in mining and energy and in manufacturing.
"Canada's economic engine is not exactly in fine shape," said LJ Valencia, an economic analyst at Desjardins, who nevertheless noted there may be less slack in the economy than previously assumed given upward revisions to GDP growth for recent quarters. Valencia anticipates a quarter-point cut next month, one of five cuts expected from the central bank to counteract pressures on the economy.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
11-29-24 1253ET
