Overall, the Canadian economy was resilient in September with an impressive 0.2% advance. Yet, contrary to expectations, the economy shrank in October according to preliminary figures, with GDP contracting by 0.3%. Despite this generally positive trend, the picture is mixed enough to warrant concern about the fourth quarter outlook, a potential disappointment for analysts and policymakers.
Even with this good news in September, the future direction for our economy looks wobbly. The Bank of Canada is expected to take a wait-and-see attitude, staying on hold with these uncertain headwinds. The bottom line is that investments have really been bloodied. They fell off a cliff 14.9% annualized over two straight quarters, to levels not seen since the first quarter of 2021. Investor sentiment is in serious freefall. While that has been bolstered by a rise in net exports, household consumption concurrently has fallen by 0.4% this quarter – the worst result since the pandemic started.
On the surface, trade data really pumped up third quarter growth. This was a big change from its prior contribution, as it had actually depressed growth in Q2. No need to bury the lead here—the Canadian economy came roaring back to life in Q3 with a surprising 2.6% annualized growth rate. Much of this record growth is due to a historic increase in net imports. That decrease fueled all the economic growth during those years. Exports, by contrast, barely budged after a big drop last quarter.
National Bank of Canada economists highlighted these dynamics, stating, “This time around, the sharp drop in imports alone accounts for all the growth in the quarter, while exports essentially stagnated after last quarter’s strong decline.” This alarming trend highlights just how tenuous today’s economic recovery remains.
Meanwhile, final domestic demand in Canada tanked in the quarter. Even as this stagnation has led to worries that such growth is sustainable in the future, analysts immediately started pointing out how surprisingly strong the economy had been in the second quarter. The drop in October may be a sign of more troubling underlying factors.
There were much-better-than-expected growth figures for September, and Q3 as a whole, and yet economists are still treading with caution. “Despite stronger-than-expected growth, our assessment of the economic situation has not changed dramatically,” they noted. This feeling is part of a larger apprehension about upcoming economic prospects.
Economists caution against reaching conclusions too early on the long-term health of the economy. “It would be very premature to conclude, based on this morning’s report, that the worst is over for the Canadian economy,” they cautioned. These types of statements underscore the value of ongoing tracking and analysis as many things lead to high or low economic performance.