Canada’s economy grew 2.0% (q/q annualized) during the third quarter of 2018. This was broadly in line with both market and our expectations. Healthy price gains, notably for exports and business investment, helped send nominal GDP growth to 5.0%.
International trade was again in the driver’s seat. In contrast to the prior period, it was less about export strength (Q3: 0.9%; down from 13.0% in Q2), and more about import weakness (Q3: -7.8%, Q2: +5.9%). Softness in imports can be put down to large contractions in refined energy products as well as aircraft and other transportation equipment. With imports down, less production went into inventories, with this category subtracting 1.3 percentage points from growth.
Consumer spending moderated, as overall household consumption rose just 1.2%, held back by durable goods spending (-2.7%) as Canadians bought fewer vehicles for a third straight quarter.
The biggest surprise in this report was a marked pull-back of non-residential business investment (-7.1%). Investment in non-residential structures fell 5.2% q/q, while machinery and equipment spending was down 9.8%. Despite a marked recovery in sales activity, residential investment fell by 5.9% as both new construction and renovation activity pulled back.
On the income side, compensation of employees rose 2.7% (4.0% on a year-on-year basis), leaving overall wage gains over the quarter at a modest 2.2% year-on-year. The household savings rate rose to 4.0% from an upwardly revised 3.4% in Q1.
Looking at the monthly data for September, there was not much momentum going into the end of the year. GDP pulled back -0.1% as just half of major industries expanded. It was largely down to goods production (-0.7%) as oil and gas extraction pulled back, hit in part by maintenance work. Solid gains in services (+0.2%) was not enough to keep the headline in positive territory.
Key Implications
Gulp. The headline may have matched expectations, but the details definitely disappointed. It is hardly an encouraging sign when the bulk of your growth comes from a contraction of imports, leaving final domestic demand negative for the first time since early 2016.
If there is an area of particular disappointment in this report, it has to again be business investment. Some headwind due to USMCA was to be expected, but the sizeable contraction was not, particularly in light of strong sentiment indicators and elevated capacity utilization. If there is a silver lining, it is that investment in the very volatile aircraft and other transportation equipment was a significant drag, an area that we don’t consider as providing a signal regarding the underlying trend.
This report was pretty much spot on Bank of Canada expectations, at least for the headline, but will likely have less bearing than normal on their deliberations. Sure to be front and center instead are commodity price developments that are hammering Canadian producers. As discussed in our recent report, we expect the resulting production cuts to hit Q4 growth, with a full recovery not expected until at least mid-2019. This creates a risk to the outlook which means that not only is December’s decision bound to be a hold, odds are January 2019 will see a pause as well. That the details of today’s report are so soft only serves to reinforce this view.
