Canada’s economy is growing, but don’t let the headline data fool you—the country is still heading for recession. Statistics Canada (Stat Can) gross domestic product (GDP) data showed big growth in Q3 2022. However, taking a dive past the headline number reveals things aren’t as great as they might appear. Household spending made a rare contraction, and business spending was mixed. The economy is strong enough for rate hikes to cool inflation, but not strong enough to avoid recession.
Canada’s GDP Growth Was Stronger Than Expected
Canada’s GDP showed strong headline growth, which sounds great at first glance. Monthly growth came in at 0.1% for September, inline with estimates. Annualized quarterly growth hit 2.9% for Q3, nearly doubling the expectations. Energy was the big driver of the trend, representing much of the growth. The rest of the economy isn’t doing so hot, and reveals the country is heading towards recession.
Canadian Household Spending Is Making An Unusual Contraction
A dive into Canada’s GDP data revealed a much more concerning outlook for households. Household spending contracted 1% in Q3, a rare occurrence in Canada. BMO noted, outside of the pandemic, this hasn’t happened since 2009. Reduced spending on goods (-6.8%) was the bulk of the drop. Even a strong gain in services (+3.8%) couldn’t make up for the reduced spending on goods.
Weaker consumers also mean weaker housing—or did expensive housing erode consumers? Kind of a chicken-egg situation. Moving on… residential investment fell 15.4% in Q3, and that’s on top of the 31.5% drop in Q2. Don’t expect it to stop there either. “…[residential investment] likely has more downside ahead,” warned Benjamin Reitzes, BMO’s managing director of macro strategy.
Though he says things aren’t all bleak. “Business investment was mixed in the quarter, with non-residential construction up nearly 12%, continuing a strong run, while machinery & equipment spending slipped 7.6%,” explained Reitzes, in a letter to investors.
Canada’s biggest bank also told investors the weak data reinforces their recession call. “… today’s data remains consistent with our own outlook for softer GDP growth in Q4 and a ‘moderate’ contraction in output in the first half of 2023,” explained Nathan Janzen, the bank’s assistant chief economist.
Canada’s Economy Is Still Strong Enough For Substantial Rate Hikes
Despite the tepid data, experts don’t see it slowing down hikes from the Bank of Canada in coming months. Stat Can noted massive upward revisions for GDP, going back to 2019. Canada’s output didn’t contract as much, and grew more than thought. Bluntly, Canada’s economy is much bigger than previously believed, and did not require as much stimulus as was given.
The Bank of Canada is likely to see this as reinforcing their belief of excess demand. That means further cooling is likely. “There’s nothing here to keep the Bank of Canada from hiking rates 50 bps at the December policy announcement,” said Reitzes.
