Canadian economy comes back to life in Q3

Canadian real GDP sprang back to life in the third quarter, growing 2.3% (q/q, annualized). Growth was in line with both market and Bank of Canada's expectations. Past growth was also revised, with the contraction in the first half of the year more shallow than initially reported (Q1: -0.7%, Q2: -0.3%; previously -0.8% and -0.5% respectively). Output growth was similarly positive from an income point of view, as nominal GDP grew 2.7% annualized (Q2: 1.6%).

Household consumption remained an important driver of growth, up 1.8%. Consumption growth was supported by spending on durable goods, up 9.7%. This likely reflects strong vehicle sales in the quarter. In contrast, the other components of consumption were soft, with services consumption up just 0.6%.

Net trade was a significant contributor to growth, adding about 1.8 percentage points to real GDP growth. Exports rose strongly (+9.4%) on the back of goods (+11.2%), while imports fell on the quarter (-2.9%).

As expected, business investment remained the sore spot in the Canadian economy, contracting a further 2.8% (Q2: -6.0%). The weakness was widespread, with all major subcategories recording declines. In contrast, residential investment grew modestly (+2.5%), supported by a rebound in construction activity. 

Despite a strong quarterly number, the September GDP by industry data provides a warning sign that the third quarter performance is not likely to be repeated. Real GDP fell -0.5% month-on-month in June, on the back of an outsized drop in mining and quarrying activity (effectively the oil and gas sector), which was down -5.1% on the month. This sector has been quite volatile, and experienced unplanned shutdowns in September. Excluding this sector, monthly GDP was down just -0.1% - not a strong performance, as many industries contracted on the month, but hardly as weak as the headline number would have suggested.

Despite continued weakness in investment the Canadian economy was able to snap back to life in the third quarter, leaving the short and shallow recession that marked the start of the year firmly in the rearview mirror. Growth came from the expected sources, as exports surged ahead on the quarter, benefitting from the low level of the Canadian dollar, and undoubtedly helped along by special factors, including the resumption of production at the Chrysler minivan plant in Windsor.

There is good reason to believe that the relatively strong growth of the third quarter will not be repeated. Momentum appears weaker heading into the fourth quarter (even abstracting from the noise in the oil and gas sector), with growth currently tracking close to 0.8%.

"We continue to expect moderate growth of around 2% per year. A continued shifting of Canadian growth drivers is anticipated, with exports taking a more leading role as the housing market takes a breather and investment continues to face the dual headwinds of low oil prices and a weak loonie", says TD Economics.