Experts foresee half-point interest-rate cut from BoC in Dec. rate decision following meagre Q3 Canadian GDP growth

Economic growth in Canada slowed to a crawl in the third quarter, undershooting the Bank of Canada’s forecast and putting a half-point interest-rate cut back in play for the monetary policy decision in December.

 

Canadian gross domestic product grew at an annualized pace of 1 per cent in July through September, down from 2.2 per cent in the second quarter, Statistics Canada reported Friday. This was broadly in line with Bay Street estimates but below the central bank’s downwardly-revised forecast of 1.5 per cent annualized growth. On a per-capita basis, GDP contracted for the sixth consecutive quarter.

 

An advanced estimate for October, which showed 0.1 per cent GDP growth that month, suggests economic activity will fall short of the central bank’s forecast in the fourth quarter as well.

 

Financial markets responded by upping their bets on another oversized interest rate cut from the Bank of Canada at its rate decision on Dec. 11. Interest-rate swap markets, which capture investor expectations about monetary policy, now see a roughly 45-per-cent chance the central bank will lower its policy rate by half a percentage point. That’s up from 30 per cent before the GDP numbers were released, according to LSEG data.

“The GDP numbers should help to reinforce that interest rates are higher than they need to be to maintain inflation sustainably at a 2 per cent rate,” Nathan Janzen, assistant chief economist at Royal Bank of Canada, wrote in a note to clients. “The BoC will also be watching next week’s labour market data closely, but our own base-case assumption is for another 50 basis point cut to the overnight rate in December.”

 

While the headline numbers showed meagre growth, the picture was mixed under the surface. Consumer spending grew at a healthy annualized clip of 3.5 per cent in the third quarter, and residential investment grew modestly for the first time in a year. That suggests interest-rate-sensitive parts of the economy are starting to respond to the monetary policy easing cycle that began in June.

 

Relatively strong consumer demand, however, was offset by softer-than-expected imports and exports as well as a significant drop in business investment, with spending on non-residential structures, machinery and equipment falling 11.3 per cent in the quarter.

 

“There is no debate that the economy struggled through midsummer and the early fall, weighed on by a variety of labour actions and some weather events. However, there are signs in both the quarterly and monthly data that domestic demand is stirring,” Douglas Porter, chief economist at the Bank of Montreal wrote in a note to clients. He said he still expects the BoC to cut by a quarter-point in December.

 

Friday’s data contained a significant upward revision to earlier GDP numbers. Statscan raised its estimates of economic activity in 2021, 2022 and 2023, as well as the first half of 2024. Combined, these revisions left Canada’s overall GDP level about 1.5 per cent higher than previously thought.

 

This suggests the Canadian economy entered the current period of weakness on a stronger footing than previously thought, and that the output gap – the difference between what an economy can produce and what it is producing – may be smaller than central bankers believed.

“The Bank of Canada will be weighing the narrower shortfall in activity against sluggish momentum in growth recently,” Royce Mendes, head of Macro strategy at Desjardins, wrote in a note to clients.

 

“The disappointment in the latest growth readings puts a 50-basis-point rate cut back on the table next month. But after taking into account the revised output gap, we still believe central bankers will opt for a more standard 25-basis-point move, particularly with the currency already trading at weak levels.”

 

With annual Consumer Price Index inflation back at the Bank of Canada’s 2-per-cent target, central bankers want economic growth to pick back up to avoid an unnecessary downturn and a further rise in unemployment. Central bank officials have said they expect to keep cutting interest rates if the economic data comes out broadly in line with the bank’s forecast.

 

The November labour force survey numbers, out next Friday, are the last key piece of information before the December rate decision.

 

 

 

 

 

This article was first reported by The Globe and Mail