Fundamental Analysis

Canadian Growth Slows, but Not as Much as Expected


A spate of indicators released this morning show continued strength in Canadian domestic demand, improved business activity and a dip in the unemployment rate to a 9-year low.

Slower Growth Sustained by Domestic Demand

Real GDP growth in Canada came in at an annualized pace of 1.7 percent in the third quarter. In each of the first two quarters of the year, Canada boasted the fastest growth of any G7 economy, so this is clearly a slowing in the growth rate. That said, the consensus had anticipated an even bigger slowdown, so today's report is a bit better than expected.

Business spending declined in seven out of eight quarters in 2015 and 2016 before bouncing back in the first couple of quarters this year. Business investment picked up, growing at a 3.5 percent annualized pace and lifting headline growth by 0.7 percentage points.

Inventories: What Goes Up…

Inventories increased for the fifth time in the past five quarters. In fact, stockpiles have been growing in double digits on a percentage basis in each quarter this year. As a result, inventories added another 1.1 percentage points to the overall growth rate.

We are concerned that a reversion to the trend-pace of inventory investment will eventually result in a drag on GDP. A mere slowing in the pace of inventory investment translates into a drag on growth in GDP accounting. For example, since the start of 2010, the average pace of inventory investment has been 6.7 percent. If inventories grew at that pace in Q4, it would result in a drag on GDP growth of more than 2.5 percentage points. We do not yet have much data to form an outlook on fourth quarter inventories, but it is something that merits watching closely.

More Help from the Consumer, but Trade Rains on the Parade

Consumer spending continued to expand just as it has in every period since the second quarter of 2009. We have been cautioning in recent quarters that household debt levels in Canada are getting worryingly high. If Canadian households begin to hold back on outlays in an effort to bring down debt levels, it would clearly be a headwind to the uninterrupted run of consumer spending growth. For now, the 4.0 percent annualized pace of spending was sufficient to lift third quarter growth by 2.3 percentage points.

So if all these measures of domestic demand were positive, where was the weakness? In a word: trade. A steep decline in exports and little change in imports resulted in a 3.4 percentage point drag from net exports.

In separate reports also released this morning, we learned that Canadian jobs increased 79.5K and the unemployment rate fell to 5.9 percent, a nine year low, and the Markit Canada Manufacturing PMI climbed to 54.4.

The Canadian dollar strengthened on this morning's news, but we still expect the Bank of Canada to remain on hold at its meeting on Wednesday of next week.

Author: Wells Fargo SecuritiesWebsite:
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