EconoFACTS

November 29, 2022 | 09:32

Canadian Real GDP (Q3) — Strong Headline, Soft Details, Big Revisions

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Canadian real GDP rose 2.9% annualized in Q3, nearly double expectations. The details weren't particularly strong with household spending falling 1% in the quarter. Outside of the pandemic period, consumer spending last fell in 2009. Goods spending plunged 6.5%, with all three major sub-sectors lower, while the 3.8% rise in services wasn't quite enough to provide an offset. Business investment was mixed in the quarter, with non-residential construction up nearly 12%, continuing a strong run, while machinery & equipment spending slipped 7.6%. Not surprisingly, housing activity slid 15.4%, and likely has more downside ahead. Governments provided a helping hand to growth, adding just under 1 ppt to the headline. Net exports were a big positive, adding 3.4 ppts, consistent with the monthly trade figures. The biggest surprise was another strong inventory build in the quarter, adding a couple of tenths to growth. We're going to get a reversal in inventories at some point in the next few quarters, if not in Q4.

The drop in household spending, combined with decent 3.3% disposable income growth, pushed the household savings rate up 0.6 ppts to 5.7%. That continues the trend of households socking away a bit extra since the pandemic, as the pre-pandemic norm was below 3%. It appears that consumers still have the wherewithal to keep spending if they choose, though perhaps they're just preparing for higher interest costs.

In what will likely be overlooked by some, but will surely catch the eye of policymakers, there were large upward historical revisions. For 2020, GDP was lifted a tick to -5.1%. The bigger revision came to 2021, which was raised 0.5 ppts to 5.0%. The historical revisions raised the level of 2022Q2 GDP by 0.7%, a sizeable increase when the Bank of Canada was already highlighting how the economy is in excess demand. Perhaps that bump in growth will be mitigated by an upgrade to potential growth, but it still supports the BoC's narrative.

On the monthly figures, September GDP rose 0.1%, as expected and in line with the flash estimate. Goods sectors drove the increase, with mining/oil/gas up 1.2% and construction gaining 0.5%. Services were flat overall, with increases in health care and recreation offset by modest weakness in a number of other sectors. The flash estimate for October is for a flat reading, a bit disappointing given the firmer monthly data already in hand. That suggests we'll see a notable slowdown in Q4 GDP growth.

Key Takeaway: The better Q3 headline masks underlying softness. Final domestic demand fell 0.6% annualized in the quarter, not a sign of strength. While September was a small positive, the flash for October points to slowing momentum. Despite the details for Q3 and monthlies coming in a bit weak, the big upward historical revisions mean the economy is substantially larger than previously thought. There's nothing here to keep the Bank of Canada from hiking rates 50 bps at the December policy announcement.

Table 1 - Canada — Real GDP

(qtr/qtr % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics

Table 2 - Canada — Monthly Real GDP

(month/month % change)

Source: BMO Economics, Haver Analytics