Canada’s economy keeps its head above ‘recession waters’ — for now

Canada’s economy contracted in the third quarter of the year, but Statistics Canada’s revised data shows the country is still managing to avoid a technical recession.

Real gross domestic product declined 1.1 per cent on an annualized basis in the third quarter of the year, the agency said Thursday. A dropoff in exports drove the decline, StatCan said, with household spending essentially flat in the quarter.

The economic contraction in Q3 was sharper than most were expecting.

StatCan itself had said in early estimates that real GDP likely dropped 0.1 per cent last quarter, while the consensus of economists had expected growth of 0.1 per cent. The Bank of Canada’s latest estimates in October called for 0.8 per cent growth.

StatCan had previously said that the economy shrank modestly in the second quarter as well, but revised figures also released Thursday show real GDP was actually up 1.4 per cent annualized.

Asked to clarify the factors behind the change, a StatCan spokesperson told Global News the revised quarterly figure is the official measure that reconciles the three ways GDP is measured: by income, by expenditure and by value added.

“As more information is made available after the reference period, an updated figure is provided,” spokesperson Carter Mann said in a statement. “This has and continues to be standard practice not just in Canada but internationally and yes, we stand behind this process and the outputs.”

Mann added the revisions for the second quarter “were well within acceptable range for revisions.”

But Randall Bartlett, senior director of Canadian economics at Desjardins, says these kinds of “substantial” revisions from StatCan are “somewhat concerning.”

When quarterly GDP data is materially revised three months on from its initial reports, or when it doesn’t line up with trends from the monthly reports the agency puts out, it affects the reliability of data that economists use to chart Canada’s economic path, Bartlett says.

Private sector economists’ forecasts inform not just the internal calculations used by banks and other institutions, but also assumptions for key government fiscal projections like the recent fall economic statement.

“I think StatCan should really be doing a little bit of soul searching in terms of trying to identify where it can improve on its estimates to minimize the revisions to the monthly data,” Bartlett says.

Advance estimates for October point to early signs of a possible rebound in Q4, with GDP potentially rising 0.2 per cent in the month.

While Bartlett says there’s signs of an “acceleration” in GDP for the fourth quarter of the year, he says the big picture view for Canada’s economy is still a slowdown.

StatCan’s GDP data year-to-date shows growth slowing each quarter from 2.5 per cent at the start of the year.

If the initial negative reading for the second quarter had held, that would have marked two consecutive declines in real GDP and met the definition of a technical recession.

However, economists tend to have a higher bar for calling a recession as they look for signs of a broader slowdown.

BMO chief economist Doug Porter said in a note to clients on Thursday that recession or not, the trend is clear.

“Whatever label you slap on this economy, it’s basically not growing, despite the artificial sweetener of rapid population growth,” he said.

“There are plenty of unexpected cross currents in today’s release, but the big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters.”

TD Bank senior economist James Orlando tells Global News that he expects Canada to continue to see “below trend growth” going forward, though with an uptick in fourth quarter GDP that would stave off a recession for 2023.

“This is closer to the soft landing scenario,” he says.

“Not necessarily a recession, an outright contraction, where we get many quarters of significantly negative growth alongside job losses that impact all of Canada. That’s not happening.”

Bartlett agrees that GDP could rise as much as one per cent in the final quarter of the year, but Deloitte is maintaining its call for a recession to hit the economy in the first half of 2024.

The Bank of Canada is set to make its final interest rate decision of the year on Wednesday.

The central bank has been raising interest rates in hopes of taking steam out of the economy and tamp down inflation, which cooled to 3.1 per cent in October. Bank of Canada governor Tiff Macklem said last week that the “excess demand” that was fuelling price pressures appears to now be stripped out of the economy.

Porter said that with a sharper than expected drop in Q3 and signs of modest growth in Q4, the latest economic data is “nearly a wash” for the central bank — reinforcing calls for no further rate hikes but not yet making the case for rate cuts.

Bartlett says that the Bank of Canada will likely be looking beyond the GDP figures in making its call next week. He says there have been enough signs of general easing in inflation and the labour market — StatCan will provide an update with its November jobs report on Friday — to keep the central bank on the “sidelines.”

While Orlando also notes that Friday’s jobs numbers will have an impact on the Bank of Canada’s decision-making, he says the central bank has“zero reason” to hike next week.

He added that if cooling trends prevail, the Bank of Canada could be in a position to start cutting its benchmark rate by the spring. Bartlett, too, expects rate cuts could begin in the second quarter of 2024.

The softening economy comes as higher interest rates put a damper on business and consumer spending.

The household savings rate was up as well last quarter, thanks in part to rising incomes. StatCan said that softening in the labour and financial markets was offset by the federal government’s introduction of the grocery rebate in July.

Orlando says that Canadians might have been more conservative with their spending this summer, bracing for a bigger hit to their incomes that hasn’t yet come to pass.

Spending was flat overall in the quarter but rose on services and durable goods like new cars, StatCan noted. Consumers might believe that Canada has avoided the worst of the downturn, Orlando says, and could start deploying some of their savings — something that would help to lift GDP in the fourth quarter of the year, which includes the busy holiday season and Black Friday sales.

“Consumers are in a very solid state right now just based on the fact they’ve been saving so much of their incomes and being a little bit more cautious as to what they’re spending over the prior few months,” he says.

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.

Boosts to government spending helped to lift the economy from an even deeper contraction in the third quarter, Orlando says.

The uptick in fiscal spending came as Canada’s economy was facing pressures from port strikes in British Columbia and wildfires raging across the country in the summer, he notes.

“Government spending was stepping up pretty at an important time to be able to prevent further downward pressure on Canada.”

— with files from Global News’s Nivrita Ganguly and Sean Boynton, and The Canadian Press