Canada GDP Again Unchanged in August -- 2nd Update

By Robb M. Stewart

OTTAWA--Canada's economy remained stalled in the latest quarter and may have dipped into a technical recession as the central bank's past aggressive rate increases weigh on output.

Gross domestic product, a broad measure of goods and services produced across the economy, was effectively flat for a second straight month in August and an early estimate points to the economy remaining stalled at the industry level in September. That indicates the economy flatlined for the third quarter and may have contracted roughly 0.1% on an annual basis, underperforming the Bank of Canada's projection, which would marking a second straight quarterly decline in GDP after a 0.2% annualized fall in the second quarter.

For economists, the stagnation in Canada's economy adds weight to expectations the central bank has done lifting interest rates and may next look to cut as past rate increases continue to work to cool inflation.

GDP by industry was little changed in August from the month before at 2.082 trillion Canadian dollars, the equivalent of $1.506 trillion, Statistics Canada said Tuesday. The data agency's advance information indicates real GDP by Canadian industries was essentially unchanged in September.

The Bank of Canada has projected economic growth will remain weak for the next year, after averaging 1% over the past year. Expenditure data may show the economy managed to eke out growth in the third quarter and avoided recession, but it still is tracking well below the central bank's estimates for total GDP growth of 0.8% on an annual basis in the third and the fourth quarters of this year.

"This is yet one more crystal clear sign that the Bank of Canada should be done hiking," said Benjamin Reitzes, managing director of Canadian rates and macro strategist at Bank of Montreal. He expects the potential for a second consecutive negative quarterly GDP reading will cause recession talk to ramp up quickly, given further downside risk to an economy that has yet to feel the full impact of the string of rate increases since last year.

The Bank of Canada last week held its policy interest rate steady at a 22-year high of 5% as past rate increases continue to work to cool the economy and relieve price pressures, though policymakers have cautioned that further easing in inflation is likely to be slow and won't return to its 2% target from 3.8% in September until some time in 2025. GDP growth is projected to remain sub-1% for the next several quarters before picking up late next year.

Recent central bank consumer and business surveys for the third quarter suggest consumers are tightening their belts and firms are set to hire fewer workers and curtail investment, which would further balance Canada's strong immigration-driven population growth and could loosen what has been a relatively resilient labor market.

"The fact that this weakness is happening at a time when population growth has been so strong, and before the majority of homeowners have yet to be exposed to higher interest rates, is a clear signal that rates will have to come down next year to avoid an even worse outcome," said CIBC Capital Markets senior economist Andrew Grantham, who anticipates the first rate cut by the Bank of Canada will occur in the second quarter of next year.

The pace of industry-level activity for August was weaker than the data agency's flash estimate, and the consensus forecast of economists, which anticipated a 0.1% advance in GDP for the month. Statistics Canada's report showed that goods-producing industries contracted modestly from the month before while services industries' production edged up.

Wholesale trade increased in August for a third time in four months, led by the machinery, equipment and supplies segment.

Mining and energy extraction notched a strong advance for the month, increasing for a third consecutive month to showing activity above the level in April, before wildfires disrupted output. Oil and gas extraction was up for a seventh time in the last eight months, for the highest level of activity since April 2019.

Still, manufacturing contracted for a third month running, and accommodation and food services pulled back to more than offset July's gain. Retail trade was also weak, contracting for a third month in a row, with motor vehicle and parts dealers contributing the most to the decline for a second consecutive month.

In all, eight of the 20 industry sectors tracked by the agency saw increases for August.

The estimate for essentially unchanged GDP in September will be updated with the release of official data at the end of next month. Statistics Canada said advance information points to decreases for the month in mining, quarrying and oil and gas extraction and for utilities, partly offset by increases in construction and public sectors.

"Signs of weakness in the Canadian economy have only grown clearer in recent months," Monex Canada foreign exchange analyst Jay Zhao-Murray said. "This could open the debate for rate cuts as soon as the first quarter of next year, even if the (central) bank wants to delay this possibility by stressing the progress in cooling inflation has recently stalled."

Write to Robb M. Stewart at [e-mail]

(END) Dow Jones Newswires

10-31-23 1138ET