Canada’s economy contracted more than expected, suggesting a pivot on rates

Canada’s economy contracted more than expected in the third quarter, suggesting that the Bank of Canada might soon pivot to cutting rates, as early as April, to avoid a deeper recession than needed.

Canada’s gross domestic product declined by 0.3 per cent in the third quarter and by 1.1 per cent on an annualized basis, a steeper decline than expected, according to data released by Statistics Canada on Thursday. There has been barely any growth since May.

The lagged impact of prior rate hikes will continue to ripple through the economy, slowing business and consumer spending.

Businesses are delaying hiring and investments as they deal with the high costs of debt. Consumers, similarly, are pulling back spending as they face mounting mortgage interest rates and rents.

The central bank’s restrictive monetary policy continues to be felt throughout the economy, putting a lid on spending.

Exports led the decline, falling by 1.3 per cent in the third quarter as gasoline prices fell. Inventories also fell as businesses wind down their inventories in anticipation of lower demand.

Read more of RSM Canada’s insights on the economy and the middle market.

Household expenditures remained flat, with household spending on services rising by 0.3 per cent while spending on durable and nondurable goods both fell by 0.4 per cent and 2.8 per cent, respectively.

These are aggregate numbers, though, aided largely by population growth. On a per capita basis, spending dropped as households dedicated a growing portion of their income to housing, leaving less for discretionary spending.

At the same time, the household savings rate climbed to 5.1 per cent in the third quarter, with rates in the higher-income brackets rising.

Households are choosing to save instead of spending since they anticipate slower wage growth, slower hiring and higher mortgage payments when their mortgage terms renew.

The takeaway

Looking ahead, Canada is on its way to entering next year with weak growth. Inflation is declining, with headline inflation expected to stay near 3 per cent in the months ahead.

With price stability in sight and the economy now contracting, the Bank of Canada can start thinking about rate cuts again.