Canada GDP grows more than expected

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Economic growth in the third quarter was much faster than the Bank of Canada predicted, raising the odds of another outsized interest-rate increase before the end of the year to quiet inflation.

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Normally, evidence of surprisingly strong growth would be welcome news. That’s less true today, because the Bank of Canada is desperately trying to contain the fastest inflation since the 1980s by ratcheting up the cost of borrowing. Governor Tiff Macklem has raised the benchmark rate by 3.5 percentage points since March in a bid to suffocate inflation that peaked at about eight per cent over the summer, and continues to hover around seven per cent.

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“The economy is still in excess demand — it is overheated,” Macklem told the House finance committee last week.

That’s why Macklem probably will dislike Statistics Canada’s latest tally of gross domestic product. The agency reported on Nov. 29 that GDP grew at an annual rate of 2.9 per cent in the July-September period, slower than the previous quarter, but considerably stronger than the 1.5 per cent pace that the Bank of Canada foresaw in its latest economic outlook.

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The results suggest the economy was having little trouble pushing through the headwinds from the Bank of Canada’s unusually aggressive approach to interest-rate increases, highlighted by a full percentage point increase in July. The central bank, which was caught flat-footed as inflation surged in the aftermath of the COVID recession, has now resorted to outsized changes to the policy rate as it attempts to catch up to inflation that has surged far ahead of its two per cent target for year-over-year increase in the consumer price index of two per cent. The latest GDP reading suggest another half-point increase when policymakers next update policy on Dec. 7.

“There’s nothing here to keep the Bank of Canada from hiking rates (a half point) at the December policy announcement,” Benjamin Reitzes, an economist at Bank of Montreal, said in a note to his clients.

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Exports, investment in non-residential structures and stockpiling by companies led the increase, Statistics Canada said. Growth in those corners of the economy was partially offset by drops in housing investment and consumer spending, both of which would be the first to suffer from higher borrowing costs and inflation’s burden on the cost of living.

The housing and consumer spending data might be sending a truer signal about the state of the economy than the headline GDP number, which was flattered by surging prices for Canada’s exports of oil, natural gas and farm commodities such as wheat.

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Household consumption declined at an annual rate of one per cent in the third quarter, after surging 9.5 per cent in the second quarter, as demand for goods such as new trucks and furniture receded. The household savings rate increased to 5.7 per cent from 5.1 per cent in the second quarter, suggesting consumers might be hunkering down for the recession that many forecasters say is inevitable. Meanwhile, investment in residential structures dropped for a second consecutive quarters, reflecting reduced demand amid higher mortgage rates.

Separately, Statistics Canada said GDP — measured by industrial output — increased 0.1 per cent in September from the previous month, compared with a 0.3 per cent gain in August. The agency said preliminary data suggest economic output was unchanged in October, implying the economy was losing momentum quickly as summer turned to fall, and suggesting the Bank of Canada’s interest rate increases will bite in the fourth quarter.

“There are worrying trends under the headline,” James Orlando, an economist at Toronto-Dominion Bank, said in a note to clients. “Rising interest rates and high inflation have weighed on consumer spending, a trend which has started earlier than expected, but should last through the year.”

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