Canada GDP slows in Q3. BoC meeting in focus

Summary

• Monthly GDP in September contracts 0.1%, marking the first decline in seven months
• Third quarter GDP increased by 2.0% on an annualized basis after the second quarter’s 2.9% increase
• Quarterly GDP rose by  0.5% following a 0.7% increase in Q2
• Bank of Canada expected to hold interest rates steady this week
• Next rate hike from the BoC could come in January
• Latest GDP data beat estimates from the BoC for the reported quarter

Economic growth in Canada was seen slowing in the third quarter, with the decline led by a contraction in the motor vehicle sales and housing investment. The data underpinned the general expectations that the Bank of Canada will be holding off from hiking rates at the meeting this week.

Official data from Statistics Canada showed that Canada’s annualized growth rate for the quarter ending September grew at a pace of 2.0%. This was down from the second quarter’s GDP growth rate of 2.9%. The third quarter GDP data matched the median estimates.

Quarter-over-quarter, real GDP grew 0.5% in the third quarter, following a 0.7% increase in the second.

On a non-annualized basis, household spending rose 0.3% in the third quarter. This was a weaker pace of increase considering that household spending rose 0.6% in the previous quarter.

Motor vehicle sales fell 1.6% while total residential investment was down 1.5% during the reported period.

The mining and petroleum refineries got a boost from the higher oil prices in the previous months which managed to underpin growth. But business investment in machinery and equipment fell 2.5% marking the sharpest decline since the third quarter of 2016.

However, the GDP data in the third quarter still beat the Bank of Canada’s estimates. The Central Bank forecast third-quarter GDP to advance 1.8% from 1.5% previously.

The data comes as the Bank of Canada meets this week. The Central Bank, which hiked interest rates five times since July 2017 is expected to pause the rate hike.

The Central Bank noted that interest rates would continue to rise given the robust economy. However, expectations are starting to ease that the growth in the fourth quarter will also come out weaker. This occurs mainly due to weaker oil prices which is one of the main exports from Canada.

On a month over month basis, Canada’s GDP actually contracted 0.1% in September. This follows seven consecutive months of gains in the economy. There was a 0.7% decline for all goods-producing industries which was the reason for dragging the GDP lower.

Following the release of the GDP data, the market probability for a rate hike at this week’s meeting was unchanged at 11.34% from the OIS markets. This was a weaker probability considering that it was above 30% earlier in November.

However, the rate hike pause is expected to be only temporary. The markets expect the Bank of Canada to deliver another rate hike in January if it doesn’t hike rates this week. This would put Canada’s interest rates to 2.0%.

Investors will be keen to see how the Bank of Canada will react to the recent decline in the economic momentum. Any signs of caution could potentially dampen further rate hike expectations.

In a separate report, data from Statistics Canada showed that producer prices increased by 0.2% in October. The increase came mostly due to increased demand for meat, fish and dairy products.