Back to Blog
6 Dec

Canadian Economy Bounces Back in Q3

General

Posted by: Kristina Crosbie

Canadian Economy Rebounds in Q3

 Canadian Economy Rebounds in Q3
 
According to data released this morning by Statistics Canada, the Canadian economy bounced back strongly in the third quarter from the Alberta-wildfire contraction in Q2. The economy grew at a 3.5% (quarter-over-quarter) annual rate in Q3, in line with expectation, following the 1.3% slide in the prior period. The rebound was driven by a sharp revival in net exports, stronger household consumption expenditures and an uptick in inventories. On the other hand, business capital formation continued weak. 

Exports of energy products surged following the decline in Q2 brought on by the wildfires and scheduled maintenance shutdowns. The one exception was natural gas exports, which declined. Weakness in export growth has plagued the Canadian economy for more than two years in the wake of the oil price decline in mid-2014. Despite the fall in the Canadian dollar, net exports of non-energy products has not been a sufficient offsetting factor. Underlying trends in Canadian net exports remain disappointing.

Consumer spending contributed to the rebound, largely in nondurable goods and services. Durable goods expenditures fell, reflecting a decline in vehicle purchases. Spending by consumers was boosted by the July 1 introduction of the new Canada Child Benefit program, which boosted household disposable income. 

Business investment in residential structures contracted following nine consecutive quarters of growth. Ownership transfer costs, which reflect activity in the resale market, contributed most of the decline in investment in housing. Resale activity in the Vancouver region has slowed significantly, exacerbated by the August introduction of a new tax on home purchases by foreign non-residents in BC. Construction of new homes dipped slightly last quarter while renovations edged up a bit.

Business investment in machinery, equipment and intellectual property remained a important laggard. The Bank of Canada has been hoping for a rebound in business capital spending because it boosts productivity and is an important indication of rising business confidence. Particularly troubling is the decline in spending for research and development and software. Overall business capital formation has decreased for eight consecutive quarters.

In a separate release, Stats Canada reported that monthly GDP increased by a better-than-expected 0.3% in September, reflecting mainly higher output in the resource sector. This starts the final quarter of the year on a relatively strong footing. 

While the third quarter’s growth was the strongest in two years, it merely reflects a rebound from the devastating contraction in Q2 and does not represent a sustainable pace of expansion. Growth in the current quarter is more likely to be roughly 2% and to come in at just under that pace in 2017. The Bank of Canada estimates that potential growth for the Canadian economy is around 1.8%, down substantially from the 3% potential growth rate posted when labour force growth was at peak levels in the 80s and 90s. Similarly in other developed economies, potential growth has slowed as the population is aging. This is why increases in productivity growth and the immigration of skilled labour is particularly important now.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres