Canada’s economy expanded at an annualised rate of just 1% in the third quarter, according to Statistics Canada. This figure, while aligning with economists’ predictions, was below the Bank of Canada’s (BoC) October forecast of 1.5%. The tepid growth has intensified debates about the size of the central bank’s upcoming interest rate cut.
Economic Growth and Key Drivers
Household spending and government expenditures provided the primary boost to GDP in the third quarter. However, these gains failed to offset declines in business investment, exports, and inventory accumulation.
On a monthly basis, growth in September was just 0.1%. Statistics Canada estimates October growth to remain at the same pace, indicating a sluggish start to the fourth quarter.
Real GDP per capita, an indicator of living standards, declined by 0.4% for the sixth consecutive quarter. Business investment in machinery and equipment dropped 7.8%, with housing renovations and new construction also falling.
Economists Debate Rate Cut Size
The BoC has reduced interest rates by 125 basis points since June, bringing the rate to 3.75%. Economists remain divided on whether the bank will opt for a quarter or half-point reduction in December.
Kyle Chapman, FX market analyst at Ballinger Group, said:
“Living standards are falling, policy is still restrictive, and inflation is at target – there is no convincing argument in the data as to why the Bank of Canada shouldn’t keep going at a 50bp pace in December.”
TD director of economics James Orlando wrote:
“The momentum in the economy should be sufficient evidence for the (Bank of Canada) to scale back the pace of cuts.”
Conversely, CIBC senior economist Andrew Grantham argued weaker growth supports a larger cut, adding:
“Although next week’s employment figures are still likely more important in making a final determination.”
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Household Savings Hit Three-Year High
Despite the weak growth, Canadian households experienced an improvement in net savings. The savings rate rose to 7.1% in the third quarter, driven by high wages and lower interest rates. This is the highest savings rate recorded since 2019 when it was below 3%.
Currency Markets Respond
Following the GDP announcement, currency markets increased bets on a 50-basis-point rate cut at the BoC’s next meeting on 11 December. The likelihood of this larger cut jumped to 44%, up from 31% prior to the data release. A quarter-point reduction remains fully priced in by markets.
Persistent Economic Challenges
Export activity continued to falter, declining 0.3% after a 1.4% fall in the previous quarter. Analysts expect a challenging fourth quarter and weak growth at the start of 2025. Proposed US tariffs of 25% and stricter immigration policies could further weigh on Canada’s GDP.
Stephen Tapp, chief economist at the Canadian Chamber of Commerce, noted:
“In this climate of heightened uncertainty, it’s hard to imagine business investment or international trade being strong contributors to Canada’s growth on a sustained basis.”
BoC to Watch Employment Data Closely
The BoC will consider next month’s employment figures before its final monetary policy decision of the year. In October, Governor Tiff Macklem announced a half-percentage-point rate cut as inflation returned to the 2% target. The central bank had earlier revised its third-quarter growth forecast down to 1.5% but may need to adjust projections further.
Looking Ahead
Canada’s economic outlook remains uncertain, with sluggish growth and weakening investment. The BoC faces a delicate balance between supporting the economy and maintaining inflation within its target range. Its next decision will be closely watched as the country navigates these economic headwinds.
