Q3 growth better than expected
Canadian economy maintaining ‘above-potential’ rate, analyst says
Canada’s economy performed surprisingly well in the third quarter, although at a slower pace than in the previous three months, as exports and business investment rose but at a weaker clip.
That still left the economy leaning heavily on consumers and waiting to see the impact of tumbling oil prices.
Gross domestic product rose by an annualized 2.8 per cent between July and September, down from 3.6 per cent in the second quarter — revised from 3.1 per cent — but still stronger than one per cent growth in the first quarter, Statistics Canada said Friday.
Most analysts had expected annualized growth of about 2.1 per cent in the third quarter.
On a monthly basis, the economy grew by 0.4 per cent in September, in line with economists’ forecasts, following a 0.1 per cent decline a month earlier.
“Although growth in the third quarter of 2014 slowed relative to the second quarter, it still represented the economy maintaining its above-potential rate,” said Paul Ferley, assistant chief economist at RBC Economics.
“As well, strong export growth in the third quarter indicated that Canadian firms continued to benefit from a strengthening U.S. economy and the earlier depreciation of the Canadian dollar.”
The Bank of Canada has been waiting for business investment to take over from consumer spending as the main driver of the economy.
That rotation has been slow in coming, with household expenditures continuing to increase — up 0.7 per cent in the third quarter on a non-annualized basis — while spending by companies for machinery and equipment, along with nonresidential structures, has been relatively flat — up just 0.1 per cent during the same period. Business investment in residential buildings grew by a non-annualized three per cent in the third quarter, the fastest rate since the first three months of 2012.
Household spending was up 0.7 per cent in the third quarter, down from an increase of 1.1 per cent previously.
Finance Minister Joe Oliver welcomed the report, saying that “while threats to the global economy loom, our Conservative government’s plan for the economy is working.”
“We will continue our unrelenting focus on jobs, growth and longterm prosperity — an approach that has seen over 1.2 million net new jobs created since the depths of the recession,” he said.
Statistics Canada reported export growth was weaker in the third quarter, up only 1.7 per cent after a 4.4 per cent gain in the second quarter. The gains between July and September were led by crude oil, metals and chemical products.
Overall, the federal data agency said the energy sector declined 1.3 per cent in the third quarter, compared with a 1.3 per cent advance the previous three months. At the same time, mining, and oil and gas extraction eased by 0.3 per cent from an increase of 1.4 per cent in the second quarter.
Meanwhile, the manufacturing sector rose 1.2 per cent between July and September, while construction activity increased by 0.8 per cent. Wholesale trade was up two per cent, and the retail sector advanced 1.2 per cent.
“Business investment was still a little bit light,” said Douglas Porter, chief economist at BMO Capital Markets. But the report did have “a nice gain in consumer spending, without being too frothy. (And) it didn’t really rely on government spending. And we had another nice contribution from net exports. In some ways, this almost is an ideal report,” he added. “Unfortunately, we’ve got this rather major external factor that has washed over our shore that pretty much counters all that very strong data” — and that “of course, then there’s the deep dive in crude oil prices.”
Given those conflicting factors, Friday’s GDP report is unlikely to provide policy-makers with any reason to adjust their neutral stance on the next direction on the central bank’s trendsetting interest rate, which has been at one per cent since September 2010.
Bank of Canada governor Stephen Poloz and his policy team will announce their next rate decision Wednesday. Although most economists do not expect a rate increase until after mid-2015, the central bank could adjust the wording of its statement to reflect the recent drop in oil prices.