The Canadian economy is slowing… or booming. It really depends on when you read the statistics, apparently. Statistics Canada (Stat Can) released real gross domestic product (GDP) data this morning, revealing a sharp contraction in the third quarter. However, it was accompanied by a massive second quarter revision, indicating the economy was performing much better than thought when rate hikes were paused.
Canadian Real GDP Contracted Sharply In The Third Quarter
Canadian real GDP contracted despite economists expecting to observe growth. Annual growth contracted 1.1% in Q3 2023, against analyst expectations of 0.1% growth for the quarter. It might be the second reported decline, but no longer fits the definition of recession, which is two consecutive quarterly declines.
Second quarter GDP was revised significantly higher. Yes, significantly—it was initially reported as a 0.2% decline, but today was revised to 1.4% growth. By itself, a revision doesn’t make an economy stronger, but the takeaway is a little unclear. Was the economy doing much better than thought?
Canada’s Economy Isn’t Growing, But It’s Not Exactly In Recession
“Whatever label you slap on this economy, it’s basically not growing, despite the artificial sweetener of rapid population growth,” explained Douglas Porter, Chief Economist at BMO.
Adding, “But reinforcing the point that it doesn’t quite sink to the level of recession, the initial read on monthly GDP for October was a surprisingly perky +0.2%, confounding expectations that activity would shrink in Q4.”
In other words, both bulls and bears will be disappointed. The country’s economy isn’t performing well, but it isn’t in recession either. With October’s data looking up, fears of a slowdown may be overblown.
“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,” said Porter.
To Hike Or Not To Hike? Revisions Muddy The Water
A weak economy is generally bad, but a number of people may be disappointed. Many investors, especially those in real estate, are hoping weaker performance may incentivize lower rates. Now with this mixed performance read, it’s not obvious how the Bank of Canada (BoC) will respond.
“The significant (upward) revisions to Q2 show us to not read too much into the decimal points on this report—don’t like today’s news?; Just wait, it will change tomorrow,” quips Porter.
He believes today’s negative contraction will be enough for the BoC to feel policy is working. However, the hold on rates was partially helped by the slow growth in the previous quarter. Had the revised numbers been reported, would the BoC have continued hiking?
“…today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” said Porter.
Earlier this year, we warned it’s difficult to rely on post-recession data. Since models are optimized to read typical economic performance, the disruption leads to significant distortions. Central bank researchers have previously warned policymakers that readings will be over- and understated. This previously complicated the recovery post-Global Financial Crisis (GFC), as policy sought to address data that wasn’t as solid as initially presented.
