Q3 2023 GDP: A mixed bag—revisions add nuance to Canada’s third quarter economic contraction

The Canadian economy contracted by 1.1% at annual rates in the third quarter. Consumer spending is stagnating and businesses are adjusting their operations amid this slow growth environment. The upward revisions to the second quarter partially tapered today’s negative growth. With decent flash estimate for October, we’re now on pace to end 2023 on better footing than previously anticipated. All together, we’re not out of the woods yet. Higher interest rates, in addition to a challenging global economic environment and sluggish consumers, will make for a precarious 2024.

Andrew DiCapua, Senior Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headlines

• Canada’s real gross domestic product (GDP) fell by 1.1% annualized in the third quarter, well below market expectations (+0.2%). However, this follows an upwardly-revised second quarter growth of 1.4% (previously reported at -0.2%). The decline was driven by lower exports and slower inventory accumulation, although government spending and housing increased.
• Monthly GDP by industry grew by a modest 0.1% in September led by manufacturing and construction.

Movers and Shakers

• Exports fell by 1.3%, mainly due to a significant drop (25%) in refined petroleum energy products. Imports edged down by 0.2%, with declines in various sectors such as clothing, footwear, and electronics.
• Slower inventory accumulation in the third quarter, the smallest since 2021, had a downward impact on GDP growth. Manufacturers drew down inventories, notably in non-durable goods, while retail inventories increased.
• Housing investment increased by 2%, marking the first positive growth since early 2022. The rise was driven by a 6.5% increase in new construction, particularly of apartments.
• Household consumption remained unchanged, with durable goods increasing by 1.0% and services by 0.3%. Non-durable (-0.4%) and semi-durable (-2.8%) goods spending declined.
• Business investment in non-residential structures declined 2% in the third quarter.
• Compensation of employees rose 1.3%, driven by increased average earnings and employment, with notable growth in professional and personal services. Household savings also increased in the third quarter, with the saving rate reaching 5.1% as household disposable income growth (+1%, boosted by July’s federal grocery rebate) surpassed the rise in spending (+0.8%).

OUTLOOK AND IMPLICATIONS

• StatCan’s flash estimate for October of 0.2% suggests that the fourth quarter is off to a surprisingly healthy start. For now, it looks like the Canadian economy could skirt a technical recession in 2023. Fourth quarter GDP is now on pace to grow around 1% at annual rates, in line with the Bank of Canada’s latest forecast (+0.8%). We’re still not out of the woods, as economic risks rise, we can’t rule out zero or negative growth over the next few quarters, and a generally weak performance in Canada and abroad.
• The Bank of Canada will view today’s data as further evidence that the economy is weak, which over time, should help bring inflation back to target. While it’s all but assure the BoC will continue holding rates for a while, it’s still too early for the Bank to talk about cutting rates.

SUMMARY TABLE

GDP CHART