The Canadian economy shrank in the third quarter as higher rates weighed on consumer and business spending, but has so far managed to skirt a recession after a significant upward revision to second quarter GDP figures.

Statistics Canada released its gross domestic product report which shows the economy contracted 1.1% on an annualized basis. It also revised up its reading for real gross domestic product in the second quarter, noting the economy did not shrink, but rather grew 1.4% on an annualized basis.

While the decline in the third quarter was offset by growth in the second quarter, economists reacting to the new data say the trend is clear: the economy is teetering. “The big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters,” wrote BMO chief economist Douglas Porter in a client note.

The federal agency says a decrease in international exports and slower inventory accumulation by businesses were partially offset by increases in government spending and housing investment in the third quarter. It also reported new housing construction in the quarter increased for the first time since early 2022, led by apartment construction.

Bank of Canada interest rate hikes have been putting pressure on consumer and business spending as they both face higher borrowing costs. The report shows consumer spending continues to be flat for a second consecutive quarter. Households are instead saving more as disposable income surpassed the rise in nominal spending.

The report says government transfers, namely the doubling of the GST rebate in the summer, propped up incomes as the labour market weakened. Meanwhile, business capital investment fell by 2% in the third quarter.

TD director of economics James Orlando noted there were one-off factors that affected the economy in the third quarter, such as the B.C. port strike and widespread wildfires. “Some of the weakness that we got in summertime seems to be bouncing back a little,” Orlando said.

Statistics Canada’s preliminary estimate for real GDP in October suggests the economy grew 0.2%, following a 0.1% increase in September.

The Bank of Canada has been striving to pull off a soft landing, meaning higher interest rates slow the economy just enough to bring down inflation but not to the point of a recession. Orlando says Canada appears to be experiencing a soft landing right now as the country averts a sharper downturn. 

Source: Globe and Mail
Source: The Star
Source: Statistics Canada