Canada’s Economy Stalls in August, Seen Slipping Into Recession in Q3

The Canadian economy stalled in August and likely slipped into a shallow recession in the third quarter, data showed a sign the central bank’s 10 interest rate hikes since 2022 are weighing on growth.

With the economy stumbling along slower than the Bank of Canada forecast, analysts said there is no need to raise rates again from 5.0%, a 22-year high. The Canadian dollar was trading lower, near its weakest level in a year.

The August result was slightly lower than 0.1% month-over-month rise forecast by analysts polled by Reuters. July GDP was revised to being marginally negative from an initial report of zero growth, Statistics Canada said.

In a flash estimate, the economy was likely also unchanged in September, and Statscan officials said that translated into an annualized 0.1% decline in the third quarter, marking a second consecutive quarter of negative growth after a 0.2% decrease in the previous quarter.

“Whether or not the economy is already in recession is less important than the fact that the lagged impacts of monetary policy are likely to materially depress economic activity moving forward,” said Tiago Figueiredo, an economist at Desjardins, in a note. “As a result, we expect the economy to more clearly enter a recession in 2024. This data reaffirms our view that the Bank of Canada is done raising rates for this cycle,” Figueiredo said.

The statistics agency said high interest rates, inflation, forest fires and drought conditions hurt growth in August. The central bank has said its previous rate hikes are sinking in.

The projected contraction in third-quarter annualized growth is far lower than the Bank of Canada (BoC) forecast at the end of October. The BoC forecast GDP growth would expand 0.8% in the third quarter, down from 1.5% projected in July.

BoC Governor Tiff Macklem said that there may not be a need for another rate increase if inflation cools in line with the central bank’s expectations.

“Given the fact that Canada has yet to feel the full impact of prior rate hikes, there’s still more downside risk ahead for the economy,” Benjamin Reitzes, macro strategist at BMO Capital Markets, said in a note. “This is yet one more crystal clear sign that the Bank of Canada should be done hiking,” Reitzes said.

Money markets see a roughly 90% chance the central bank will leave interest rates on hold at its next policy announcement in December, while the Canadian dollar was trading 0.3% lower at 1.3865 to the greenback, or 72.12 U.S. cents.

Canada’s goods-producing sector contracted 0.2%, dragged down by the third consecutive month of declines in the manufacturing sector. The service-producing sector posted a 0.1% rise, in part helped by the wholesale trade and the transportation and warehousing subsectors.

Source: Reuters
Source: bloomberg
Source: Statistics Canada

U.S. Economic Growth Accelerates in Third Quarter as Higher Wages Help Boost Consumer Spending

The U.S. economy grew faster-than-expected in the third quarter, again defying dire warnings of a recession, buoyed by robust consumer spending amid a resilient labour market. The fastest growth pace in nearly two years reported by the Commerce Department’s Bureau of Economic Analysis in its advance estimate of third-quarter gross domestic product was also spurred by a rebound in residential investment after nine straight quarterly declines. Businesses ramped up the restocking of warehouses and shelves to meet the strong demand. But business investment softened as outlays on equipment declined and the boost from the construction of factories faded. 

While the robust growth pace notched last quarter is likely not sustainable, it showcased the economy’s stamina despite aggressive interest-rate hikes from the Federal Reserve. Still, growth could slow in the fourth quarter because of the United Auto Workers strikes and the resumption of student loan repayments by millions of Americans.

Most economists have revised their forecasts and now believe the Fed can engineer a “soft-landing” for the economy, citing expectations that the July-September period will show a continuation of second-quarter strength in worker productivity and moderation in unit labour costs. “Economic growth transitioned from resilience to reacceleration this quarter, defying the Federal Reserve’s aggressive tightening cycle and tighter financial conditions,” said Olu Sonola, head of U.S. economics at Fitch Ratings in New York.

GDP increased at a 4.9% annualized rate in the third quarter higher than the 4.3% expected from the Reuters poll of economists. The economy grew at a 2.1% pace in the second quarter and is expanding at a pace well above what Fed officials regard as the noninflationary growth rate of around 1.8%.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 4.0% rate after only rising at a 0.8% pace in the second quarter. It was driven by spending on both goods and services. Consumers spent more on housing and utilities, health care, financial services and insurance. They dined out and stayed at hotels and motels.

Consumers also bought more recreational goods and vehicles, and boosted outlays on nondurable goods like prescription medication. The labour market is providing underlying support to spending. Though wage growth has slowed, it is rising a bit faster than inflation, lifting households’ purchasing power.

But risks are growing for spending. Student loan repayments resumed in October, which economists estimated was equal to roughly US$70-billion, or around 0.3% of disposable personal income, and could dent spending. Though excess savings accumulated during the pandemic remain ample, they are largely concentrated among high-income households.

Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit-card delinquencies. Last quarter, the increase in wages was partially offset by a rise in personal taxes. That led to income at the disposal of households after accounting for taxes falling at a 1.0% pace last quarter. The result was that consumers dipped into their savings to fund some of their spending.

The saving rate decreased to 3.8% from 5.2% in the third quarter. Some economists see a sharp slowdown around the corner. Others are not too concerned, noting the labour market continues to churn out jobs at a solid clip.

Labour-market resilience was highlighted by a separate report from the Labour Department, showing the number of people filing new claims for state unemployment benefits rose 10,000 to a seasonally adjusted 210,000 during the week ending Oct. 21. Claims are at the very low end of their range of 194,000 to 265,000 for this year.

The GDP data likely has no impact on near-term monetary policy amid a surge in U.S. Treasury yields and a stock-market selloff, which have tightened financial conditions.

While the report showed overall inflation picking up last quarter, underlying price pressures continued to abate.

The price index for personal consumption expenditures (PCE) excluding food and energy increased at a 2.4% rate after rise at a 3.7% pace in the second quarter. The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. Financial markets expect the U.S. central bank to keep interest rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group’s FedWatch. 

Source: Globe and Mail

Canadian Retail Sales Down 0.1% in August, Boost Expectations of Rate Pause

Canadian retail sales fell by 0.1% in August from July and look set to stay flat in September, Statistics Canada said, cementing expectations that the Bank of Canada will keep rates on hold. Analysts polled by Reuters had forecast a 0.3% decline from July. Growth in Canada has stalled, in part owing to 10 rate hikes by the central bank since March, 2022, as it tries to bring stubbornly high inflation back down to its 2% target.

Core retail sales decreased 0.3% in August, led by 1.2% lower sales at food and beverage retailers and, to a 1.1% decline in sporting goods, hobby, musical instrument, book and miscellaneous retailers. Sales at food and beverage retailers were down from lower sales at supermarkets and other grocery retailers (except convenience retailers) as well as and beer, wine and liquor retailers. Building material and garden equipment and supplies dealers saw no change during the month of August. However, the largest increase to core retail sales came from a 1.2% increase at health and personal care retailers.

“The soft report is yet one more reason to expect the Bank of Canada to keep policy rates on hold,” BMO Capital Markets economist Shelly Kaushik said in a note. The Bank of Canada will make a rate announcement and release its latest forecasts on Oct. 25. Governor Tiff Macklem said the bank would not be predicting a serious recession.

Desjardins analyst Tiago Figueiredo said third quarter annualized growth was likely to be just 0.2%, compared with the 1.5% the bank was predicting in July. “The cool pace of sales growth in September also suggests a weak handoff for the fourth quarter … this data reaffirms our view that the Bank of Canada is done hiking rates,” he said.

Although 12% of retailers reported their business in August had been hit by a port strike in British Columbia, CIBC Economics analyst Katherine Judge said the flat prediction for September indicated weak consumer spending.

Money markets trimmed bets for a rate hike after the data. They now see a 15% chance for an increase next week, slightly down from 16% before the data release.

Source: Globe and Mail
Source: Statistics Canada

U.S. Retail Sales Rise 0.7% in September, Reflecting Shoppers’ Resilience Despite Higher Prices

Americans showed their steadfast resilience and kept spending online, at restaurants and other outlets in September even as they grappled with higher prices, rising interest rates and a host of other headwinds piling up.

Retail sales rose 0.7% in September, more than twice what economists had expected, and close to a revised 0.8% bump in August, the Commerce Department reported. Retail sales in August were inflated after gasoline prices spiked, however. That was not the case in September when gas prices rose more slowly.

A closely watched category of retail sales that excludes auto dealers, gas stations and building materials and feeds into the gross domestic product jumped 0.6% in September  compared to August.

The government’s monthly retail sales report offers only a partial look at consumer spending; it doesn’t include many services, including health care, travel and hotel lodging. But it does cover spending at restaurants, which had a solid 0.9% increase. Spending online rose 1.1% in September, according to the report. Sales at general merchandise stores rose 0.4%.

Sales at home furnishings and furniture stores were flat, while electronics stores and outlets that sell building materials saw declines reflecting a difficult housing market.

The retail sales report, which reflects the sixth consecutive monthly gain, reinforces the fact that American consumers, as a whole, are showing no signs of pulling back on their spending, which powers most of the economy. That spending comes despite attempts by the Federal Reserve to cool spending and hiring. That’s good news heading into the critical holiday shopping season. But the robust sales report also means that the Fed officials could leave the door open for additional rate hikes. 

“If the cost-of-living crisis has hit consumer confidence, you wouldn’t know it judging by a second month of strong retail sales with the consumer buying everything that wasn’t nailed down,” said Christopher S. Rupkey, chief economist at FWDBONDS LLC, a financial markets research company. “Fed officials have another rate hike this year up on their forecast board, and they will need to use it, if the economic data continues to surprise economists on the upside.”

Still, questions remain whether shoppers will finally buckle under more bad news piling up from federal budget wrangling, the resumption of student loan repayments, and new global tensions tied to the Oct. 7 surprise attack by Hamas in Israel. Analysts say that shoppers could also become rattled if the Israel-Hamas war is not contained.

Moreover, the relentless spending by shoppers also comes at a cost to their household finances.“We have repeatedly underestimated the U.S. consumer, ” said Tim Quinlan, a senior economist at Wells Fargo Economics. “But in pulling off this spending spree, consumers have dented their household finances, a theme that is evident not only in the diminished savings, but also the trend rise in credit card delinquencies.”

Healthy consumer spending is expected to lift the economy’s growth rate to about 3.5% or possibly even higher in the July-September quarter. September’s strong sales also suggests the economy may not slow as much in the final three months of the year as previously expected, analysts said.

The retail sales report came as businesses across the U.S. economy ramped up hiring in September, defying surging interest rates, and the ongoing threat of a government shutdown. The strength of hiring has surprised economists inside and outside of the Fed.

Consumer prices rose 0.4% from August to September, below the previous month’s 0.6% pace. The report from the Labor Department also showed that year-over-year inflation was flat in September from a 3.7% rise in August.

Meanwhile, retailers are pulling out discounts and other incentives to get shoppers to open their wallets for the holiday season as they worry about shoppers’ finances. Best Buy, the nation’s largest consumer electronics retailer, unveiled a new experience that gives shoppers a chance to access some of the biggest deals and cool gadgets of the holiday season. The items, which kicked off late last month, are only available in limited quantities and exclusively through the Best Buy app.

Source: Globe and Mail