Canadian Economy’s Third-Quarter Growth Tops Forecasts, but Higher Interest Rates Starting to Bite / Economists See Underlying Signs of Weakening in Third Quarter GDP Numbers

Canada saw stronger than expected economic growth in the third quarter, but economists warn the underlying numbers don’t paint such a positive picture. Statistics Canada said on November 29 that the economy grew at an annualized rate of 2.9% between July and September. That compares with 3.2% growth in the second quarter.

Although the headline growth rate is significantly stronger than forecasters had anticipated, the fall in consumer spending suggests higher interest rates are beginning to affect the economy more broadly. “Sometimes the headline numbers look one way and the rest is quite a bit different,” said Karyne Charbonneau, CIBC’s director of economics.

Household spending fell for the first time since the second quarter of 2021, edging down 0.3%. Charbonneau said higher interest rates force consumers to pull back on spending as mortgage costs rise. At the same time, consumers shy away from expenses that are financed through credit and therefore incur interest charges, she said.

Investment in housing fell sharply, with a 15.4% annualized decline in residential investment. Renovation and housing resale activity both fell, as rising interest rates continue to push up mortgage costs.

Overall, economic growth was led by an increase in exports, non-residential structures and business investment in inventories. Growth in those areas was moderated by declines in housing investment and household spending.

The economy is widely expected to slow down more noticeably in the fourth quarter in response to rising interest rates. Since March, the Bank of Canada has raised interest rates six consecutive times, rapidly bringing its key rate up to 3.75%. The rate hikes were first felt in the housing market, which cooled dramatically as mortgage costs climbed. With time, economists expect these rate hikes to affect spending in more parts of the economy.

Statistics Canada’s preliminary estimate for October provides a glimpse of what can be expected in the fourth quarter, which suggests the economy stayed flat during the month.

Another sign the economy is slowing is the accumulation of inventories by businesses in the third quarter, despite inventories contributing positively to real gross domestic product. Statistics Canada said this marked the second consecutive quarter of large inventory accumulation.

RBC assistant chief economist Nathan Janzen said the pile up of inventories could be indicating that businesses are struggling to sell their products. “Consumer demand was actually slowing, particularly for physical merchandise. So at least some of that inventory build may have been unwanted (products),” Janzen said. As demand weakens, businesses will likely restock their shelves with those inventories rather than put in new orders, he added.

Both economists noted the underlying weakness in the quarterly GDP data is exactly what the Bank of Canada wants to see. “I don’t think they’ll be too disappointed to see slower consumer spending because that’s strong consumer spending has been what’s fueling inflation,” Janzen said.

The Bank of Canada will announce its next interest rate decision on Dec. 7. Forecasters are split on whether the Bank of Canada will opt for a quarter or half percentage point rate hike.

On a quarterly basis, real GDP in the third quarter increased by 0.7%, beating out the federal agency’s preliminary estimate for growth, which was 0.4%. Monthly real GDP data shows the economy grew by 0.1% in September, with the increase in real GDP driven by goods-producing industries.

The quarterly GDP report also provides insight on how Canadians’ wages changed. On a quarterly basis, nominal compensation for employees rose 1.2%, which marks the slowest growth in compensation since the second quarter of 2020.

At the same time, household saving rates increased from 5.1% in the second quarter to 5.7% in the third quarter. For comparison, the savings rate in the third quarter of 2019 was 2.5%. The federal agency notes saving rates tend to be higher for higher income earners.

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

Canadian Retail Sales Drop 0.5% in September; Gain of 1.5% Forecast for October

Retail sales fell 0.5% to $61.1 billion in September led by a drop in sales at gas stations along with food and beverage stores, Statistics Canada said. However, the agency said its initial estimate for October pointed to a gain of 1.5% for the month, though it cautioned the figure would be revised.

“Retail sales fell in September; though the drop was smaller in volume terms, real spending took a notable step back in the third quarter,” BMO economist Shelly Kaushik wrote in a report. “However, solid advance estimates for retail and manufacturing sales, as well as wholesale trade, point to a recovery in October.”

For September, Statistics Canada said sales at gas stations fell 2.4% as sales in volume terms at gas stations rose 4.2%, but gas prices fell 7.4%.

Meanwhile, sales at motor vehicle and parts dealers were relatively unchanged as sales at used car dealers slipped 3.5%, offset by a 2.3% gain at other motor vehicle dealers and automotive parts, accessories and tire stores rose 0.4%.

Sales at food and beverage stores dropped 1.3% in September, as supermarkets and grocery store sales fell 1.6% and convenience stores lost 1.5%.

Sales at building material and garden equipment and supplies dealers fell by 2.0%. This decrease occurred as the Bank of Canada’s most recent monetary policy report projected forthcoming weakness in interest-rate-sensitive retail sectors, such as home maintenance and furniture stores. Building material and garden equipment and supplies dealers, and furniture and home furnishings stores both reported declines in the third quarter.

Core retail sales — which exclude sales at gasoline stations and motor vehicle and parts dealers — fell 0.4% in September. In volume terms, retail sales fell 0.1% in September.

Retail sales for the third quarter as a whole were down 1.0%, the first quarterly decline since they fell 11.9% in the second quarter of 2020 at the start of the pandemic. Retail sales in volume terms were down 1.4% in the third quarter of 2022.

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

U.S. Third-Quarter Economic Growth Revised Up; Goods Trade Deficit Widens in October

The U.S. economy rebounded more strongly than initially thought in the third quarter, the government confirmed, but higher interest rates as the Federal Reserve battles inflation have raised the risks of a recession in 2023.

That was underscored by other data showing private payrolls increased at their slowest pace in nearly two years in November, while the goods trade deficit widened sharply in October. Labor market resilience has been the economy’s main pillar of support. A smaller import bill helped to drive growth last quarter.

“Though the economy is not in recession, the expansion is highly vulnerable to anything else that might go wrong,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Gross domestic product increased at a 2.9% annualized rate, the Commerce Department said in its second estimate of third-quarter GDP. That was revised up from the 2.6% pace reported in October. The economy had contracted at a 0.6% rate in the second quarter. Economists polled by Reuters had forecast GDP growth would be raised to a 2.7%. The upward revision reflected upgrades to growth in consumer and business spending as well as fewer imports, which offset the drag from a slower pace of inventory accumulation.

With the Fed in the midst of what has become the fastest rate-hiking cycle since the 1980s, the economy is in danger of sliding into recession as early as in the first half of 2023. Economists, however, believe any downturn will be short and mild because of unprecedented labour market strength.

The housing market is crumbling, with residential investment contracting for six straight quarters, the longest such stretch since the housing market collapse in 2006.

Consumer and business confidence are in decline, which could hurt spending and undercut job growth, which is gradually slowing. Private employment increased by 127,000 jobs in November, the smallest gain since January 2021, the ADP National Employment report showed on Wednesday. Economists had forecast private jobs increasing 200,000.

The goods producing sector shed 86,000 jobs, the bulk of them in manufacturing. The services sector added 213,000 jobs, most of them in the leisure and hospitality industry.

The ADP report, jointly developed with the Stanford Digital Economy Lab, was published ahead of the Labor Department’s Bureau of Labor Statistics’ more comprehensive and closely watched employment report for November.

According to a Reuters survey of economists, nonfarm payrolls likely advanced by 200,000 jobs in November. The economy created 261,000 jobs in October.

A third report from the Commerce Department showed that the goods trade deficit surged 7.7% to $99.0-billion last month. Exports of goods dropped 2.6% to $173.7-billion. Goods imports rose 0.9% to $272.7-billion, some of which likely ended up as inventory at wholesalers. October’s sharp widening in the deficit suggested trade could be a drag on GDP in the fourth quarter.

“Trade will likely be modestly negative for growth through the rest of the year and in 2023 as slowing global growth and a deteriorating global economic outlook weigh on exports,” said Abbey Omodunbi, a senior economist at PNC Financial in Pittsburgh, Pennsylvania.

The Commerce Department also reported that wholesale inventories increased 0.8% in October after rising 0.6% in September. Retail inventories fell 0.2% after dipping 0.1% in September. Motor vehicle stocks increased 0.4%.

Excluding motor vehicles, retail inventories slipped 0.4% after dropping 0.9% in September. This component goes into the calculation of GDP. Inventories subtracted from GDP growth in the third quarter.

Source: Globe and Mail

U.S. Retail Sales Increase More Than Expected in October, Boosted by Vehicle Purchases

U.S. retail sales increased more than expected in October as households stepped up purchases of motor vehicles and a range of other goods, suggesting consumer spending picked up early in the fourth quarter, which could help to support the economy.

The solid retail sales reported by the Commerce Department and signs of a slowdown in inflation raised cautious optimism the economy could avoid an anticipated recession next year or just experience a mild downturn. “We might be in for a soft landing after all,” said Paul Ashworth, chief North America economist at Capital Economics in Toronto.

Retail sales rose 1.3% in October after being unchanged in September. Economists polled by Reuters had forecast sales rising 1.0%. Retail sales are mostly goods and are not adjusted for inflation. They increased 8.3% year-on-year in October.

One-time tax refunds in California, which saw some households receiving as much as $1,050 in stimulus checks, likely helped to underpin sales. In addition, Amazon held a second Prime Day promotion in October.

The broad increase in sales in October was led by motor vehicles, with receipts at auto dealers rebounding 1.3%, reflecting significant improvements in supply. Furniture stores sales increased 1.1%. Sales were also buoyed by higher gasoline prices, with receipts at service stations rising 4.1%.

Online retail sales jumped 1.2%. Sales at food services and drinking places, the only services category in the retail sales report, increased 1.6%. But electronics and appliance store sales slipped 0.3%.

There were also decreases in receipts at general merchandise stores as well as sporting goods, hobby, musical instrument and book stores. Clothing stores sales were flat.

Massive savings accumulated during the COVID-19 pandemic, and strong wage gains amid a tight labour market, have generally helped consumers to weather higher prices and borrowing costs. Households are also borrowing to maintain spending.

That support is expected to fade in 2023 as tighter monetary policy dampens overall demand, weighing on the labour market and the economy. Low-income households are believed to have already exhausted their pandemic savings.

The National Retail Federation forecast in November that holiday sales would grow between 6% and 8% this year. While that would be a step down from the 13.5% notched in 2021, it would be well above the 4.9% average over the past 10 years.

The Federal Reserve has raised its policy rate by 375 basis points this year from near zero to a 3.75%-4.00% range as it battles rampant inflation in what has become the fastest rate– hiking cycle since the 1980s.

Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.7% in October. Data for September was revised higher to show these so-called core retail sales rising 0.6% instead of 0.4% as previously reported.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. A steady pace of consumer spending and a smaller import bill helped GDP to rebound at a 2.6% annualized rate in the third quarter after contracting in the first half of the year.

Source: Globe and Mail