Canadian economy declines in November for the first time this year
The Canadian economy appeared to lose its strength toward the end of this year even as the central bank cut interest rates at a rapid pace.
Advance data suggested gross domestic product shrank 0.1% in November, the first monthly contraction this year, after 0.3% expansion a month earlier, Statistics Canada said Monday. The October figure beat economist expectations of 0.2% in a Bloomberg survey.
With October’s stronger-than-expected gain and November’s decline, the industry-based data point to the economy growing at a 1.7% annualized pace in the final quarter, assuming December growth is flat. That would be above economist estimates of 1.5% but below the central bank’s forecast of 2%. It would also be an acceleration from the expenditure-based 1% growth in the third quarter.
Canadian government two-year bond yields fell just over a basis point to 3.038%, while the loonie extended declines, dropping to C$1.4430 per US dollar as of 9 a.m. in Ottawa.
Policymakers at the Bank of Canada want to see economic growth pick up after inflation was within their target range of 1% to 3% for the past 11 months. They reduced borrowing costs by a half percentage point for the second straight meeting earlier this month, bringing the accumulative rate cuts since June to 175 basis points.
Governor Tiff Macklem and his officials have already signaled that they’re ready to slow down their rapid easing campaign, and output figures that are slightly below their forecasts will likely keep them cutting, albeit at a more gradual rate next year.
Their next decision is due on Jan. 29, when they will also publish a new set of economic forecasts. But Canada’s immigration crackdown, a two-month sales tax holiday, potential US tariffs and the uncertainty surrounding the future of Prime Minister Justin Trudeau will affect the outlook for growth and inflation in the months ahead.
An aerial view of Alberta’s oilsands. Oil and gas extraction jumped in October before declining in November.
“While there is evidence that interest-rate sensitive areas of the economy have already strengthened as the Bank of Canada has lowered rates, further interest rate relief will be needed in the New Year to help close the output gap,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a report to investeors.
The bank’s benchmark overnight rate is currently 3.25%. Grantham said CIBC continues to see rates needing to dip slightly below neutral, forecasting a low of 2.25% in 2025.
In October, mining, quarrying and oil and gas extraction contributed most to the growth, expanding 2.4% following three straight months of decline. But the strength appeared short-lived, with the sector contributing to the decline in output in November.
Transportation and warehousing grew for the third straight month, increasing 0.2% in October, despite strike activities at the Port of Montreal and several eastern ports in the US. But November’s preliminary data showed the sector contracted, ending that streak of growth.
November’s contraction “is hardly a surprise given the slump in rail freight traffic following the earlier port strikes and the start of the Canada Post strike, some of which will be reversed in December,” Stephen Brown of Capital Economics said in a report to investors.
He said with growth tracking close to the bank’s forecast, it’s “raising the chance of the Bank of Canada pausing at its next meeting in January.”
There are signs that the central bank’s rapid rate cuts are starting to boost economic activity, especially in the housing market.
Real estate rose 0.5% in October, the sixth straight monthly increase and the largest monthly growth rate since January.
The offices of real estate agents and activities related to the housing sector was the largest contributor to the sector’s increase in October as home sales rose that month, driven by higher activity in key markets in Toronto and Vancouver regions.
The industry’s activity level in October was at its highest point since April 2022, just after the Bank of Canada began its hiking cycle.
“All told, this is a pretty decent report,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said in an email, pointing to fourth-quarter growth in line with economists’ forecasts. There is “nothing here to change the more gradual rate cut narrative,” he said.
Advance data also suggest the real estate momentum continued in November, with the sector along with accommodation and food services leading the gains that month.
The increases in these two sectors, however, couldn’t offset output losses in mining and oil and gas extraction, transportation and warehousing, and finance and insurance in November.
This article was first reported by BNN Bloomberg
