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Does Canadian GDP Indicate Signs of Economic Resilience or A Coming Recession?
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Published Sep 29, 2023 15:16
© Reuters.
Earlier today, Statistics Canada data showed that the Canadian economy recorded no growth in July, compared to expectations of 0.1% growth, and after a 0.2% decline in June.
Preliminary figures for August indicate 0.1% expansion.
The Canadian economy is now on track to increase 0.2% in Q3 - well below the Bank of Canada's 1.5% forecast published in its July Monetary Policy Report.
However, economists are divided on the implications of today's reading - with some believing the data to be unequivocally negative - while others believe the reading to in fact, indicate resilience in the Canadian economy.
Here's a roundup of economist commentary:
TD (TSX:TD) Economics: The Canadian economy shows "a magnitude of decline typically only seen during recession"
Robert Kavcic, Senior Economist and Director at TD Economics believes that today's data shows a crumbling Canadian economy, pointing out that "In per capita terms, Canada’s real GDP is now on track to be down more than 2% y/y in Q3, a magnitude of decline typically only seen during recession."
He also notes that Canada's real GDP per capita has been essentially unchanged since the end of 2016, compared to 1.7% annualized growth in the U.S.
Scotiabank (TSX:BNS): "A sign of resilience that the economy has yet to contract"
Derek Holt, Vice President and Head of Capital Markets Economics at Scotiabank, however, offers a different perspective.
While noting that Canadian GDP data "makes for two consecutive quarters of flatness", he adds two caveats that indicate a hidden strength in the Canadian economy.
Holt notes, that the Canadian economy "continues to skirt tail bets that it would slip into recession over Q2-Q3", pointing out that " not even one contraction has been registered thus far, and in any event, a recession call requires more than just back-to-back contractions in GDP."
Secondly, Holt points out that the Canadian economy is "trapped in the serial shocks story" given wildfires, weather, and plenty of strikes. Holt notes that "Absent such transitory shocks in a very unusual summer there would have been mild growth".
"In fact, it’s a sign of resilience that the economy has yet to contract despite everything that mother nature and striking workers have thrown at it."Looking ahead, Holt remains "cautiously optimistic that the economy can still squeeze out modest growth over the duration of the year."
CIBC (TSX:CM): "Swings in monthly GDP have been driven mainly by supply disruptions"
The effect of transitory shocks on the Canadian economy obfuscating the implication of GDP readings is also a view iterated by CIBC's Andrew Grantham.
Grantham also notes that "Recent swings in monthly GDP have been driven mainly by supply disruptions, such as wildfires and the port strike".On the downside, this means "That weak GDP reading may not necessarily translate into lower inflationary pressures in the near-term".
On the whole however, and looking at economic data such as retail sales, Grantham believes there is enough "evidence that domestic demand is responding to higher interest rates", and that is should be enough to keep the Bank of Canada on hold for the rest of the year.
RBC (TSX:RY): "Base-case forecast does not assume additional Bank of Canada interest rate hikes"
RBC economist Claire Fan is also among those who believe that "There are growing signs that the impact of earlier interest rate increases are working to cool the economy", leading to a "base-case forecast does not assume additional BoC interest rate hikes."
Fan does acknowledge however that "With interest rates already at very restrictive levels, further increases from the BoC and other central banks will remain very data dependent."
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