Canadian economic growth rebounds in third quarter

Ottawa – The Conference Board of Canada’s Chief Economist Craig Alexander offers the following insights on the third quarter GDP announcement: “The Canadian economy rebounded in the third quarter and this sets the stage for economic growth to accelerate from a roughly 1.3 per cent pace in 2016 to close to 2.0 per cent in 2017. However, some of the details of today’s report were discouraging. Business investment in machinery and equipment contracted last quarter and the rate of investment in recent years is below the pace of depreciation. This is undermining Canada’s future growth potential.”

Insights:
·         As anticipated, the Canadian economy rebounded in the third quarter from the Alberta-wildfire induced contraction in the second quarter. Despite a solid gain, the Canadian economy is still on track to deliver modest growth this year of around 1.3 percent. The latest real GDP estimates are modestly better than projected by the Bank of Canada in its October Monetary Policy Report and thus reduce the case for further rate cuts. As the economy steadily, but gradually, expands in the months ahead and benefits from federal fiscal stimulus, The Conference Board of Canada continues to expect monetary policy to remain on hold until mid-2018.

·         The Canadian economy expanded by an annualized 3.5 per cent from July to September from a revised smaller annualized decline of 1.3 per cent during the April to June period. For the month of September, real GDP rose 0.3 per cent, providing a good handoff to the fourth quarter.

·         Exports jumped higher by an annualized 8.9 per cent in the third quarter, led by energy exports that reversed their decline caused by the Fort McMurray fires.

·         Consumer spending remained a solid foundation for economic growth, expanding at an annualized rate of 2.6 per cent from July to September. Household expenditure makes up close to 60 per cent of Gross Domestic Product.

·         However, other details of the report were less encouraging. In particular, business investment in machinery and equipment (M&E) fell by an annualized 12.2 per cent in the third quarter. This is troubling, as investment in M&E has been a source of serial disappointment in recent years and Canadian firms are not even investing enough to offset the pace of depreciation. This means the capital stock in Canada is declining, and this has led the Conference Board to lower our assessment of Canada’s medium-term potential growth rate. In other words, weak investment today is hurting future growth prospects.

·         A $4.8 billion increase in inventories during the third quarter may also act as a headwind in the fourth quarter of this year as retailers and wholesalers work down their inventory levels, but this would simply add to the volatility in the economic growth statistics. The Conference Board anticipates growth slowing from 3.5 per cent last quarter to around 2.5 per cent in the final quarter of 2016.

Source: www.conferenceboard.ca.