Highlights:
- Canadian GDP was unchanged in October following a 0.2% increase in September.
- Output of goods producing industries fell 0.4% while services growth returned to a trend-like 0.2% pace. Both were short of our expectations.
- A decline in non-conventional oil extraction due to maintenance shutdowns shaved about 0.1 percentage point from October’s GDP growth.
- Today’s report indicates some downside risk to our forecast for 2.0% annualized growth in Q4. Something along the lines of Q3’s 1.7% increase looks more likely.
Our Take:
Yesterday’s upside surprises on retail sales and inflation were countered by this morning’s monthly GDP numbers showing a slow start to Q4. As was the case in the summer when the economy appeared to hit a soft patch, temporary shutdowns in one industry were responsible for some of October’s weakness. Nonetheless, GDP growth has clearly shifted to a slower trend after 4% gains earlier this year. Today’s release points to Q4 growth coming in closer to Q3’s 1.7% increase than the Bank of Canada’s 2.5% forecast. That would still be at or slightly above the economy’s longer run speed limit, so while the second half of 2017 won’t be nearly as impressive as the first half, trend-like growth should keep the economy running near full capacity. With inflation starting to respond to these tight conditions, we don’t think it will be long before the Bank of Canada acts on their tightening bias. However, today’s data lessens the odds of a move as soon as January. We continue to expect uncertainties surrounding Nafta and new mortgage regulations will have the bank holding off until April. Our forecast assumes three rate hikes next year will shift monetary policy to a less stimulative stance by the end of 2018.
