Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.

Bottom line

The economy contracted in the third quarter and was much weaker than expected but growth was revised sharply higher in the second quarter. The details show a significant slowdown in inventories and business investment and a decline in net exports were the main drag to the economy. On the flip side, government spending and residential investment were the main sources of growth, while consumer spending was flat.

Disposable income rose in the third quarter due to higher compensation of employees. However, once adjusted for inflation, real disposable income barely increased, meaning little improvement in households’ purchasing power. However, real disposable income remains below its pre-pandemic trend. The saving rate increased on the quarter, suggesting that households continue to be cautious with their spending. With inflation and interest rates remaining high, households continue to face pressures on their purchasing power and finances.

We expect economic activity to remain weak in the rest of 2023 as the higher interest rates continue to take their toll on economic activity, especially residential investment and consumer spending. Interestingly, the robust increase in the preliminary GDP estimate for October provides a better starting point for the fourth quarter.

Today’s GDP number does not change our view that the Bank of Canada is likely done hiking interest rates. The focus is shifting to the timing of the first rate cut and to how weak the economy will be next year. As we have argued (see Will it be a hard landing or a soft landing? The labour market will decide), whether we see an underperformance in hiring or job losses will matter greatly.

Canadian economic activity declined by 01.1% q-o-q annual rate (ar) in the third quarter of 2023 (+0.5% y-o-y), much weaker than expected by the consensus and the Bank of Canada. However, this followed an upwardly revised increase of 1.4% q-o-q ar. in the second quarter of 2023 (originally reported as -0.2% q-o-q ar.). Two years after the start of the pandemic, economic activity stands 4.2% above its pre-pandemic level.

In terms of details, strong government spending (contributing 1.6 percentage points (pp) to growth), residential investment (contributing 0.6pp to growth) were the main source of growth in the third quarter.

These increases were offset by slower inventory accumulation (reducing growth by 1.0pp to growth), a decline in non-residential investment, and in machinery and equipement  (reducing growth by 0.5pp each) and lower net exports (reducing growth by 1.5pp to growth). Final domestic demand improved slightly in 3Q, contributing 1.3pp to growth.

Household spending increased by a marginal 0.1% q-o-q ar, contributing 0.1pp to growth. This followed a small decline of 0.1% q-o-q ar. in the second quarter of 2023. The increase in consumer spending was the result of higher spending on services (+1.4% q-o-q ar.), while it decline on goods (-1.5% q-o-q ar.). The decrease in spending on goods was mainly in non-durable and semi-durable goods, while it increase for durable goods, especially for motor vehicles.

Residential investment rose by 8.3% q-o-q ar., adding 0.6pp to growth. This is the first increase since earl0y 2022. The increase in activity in the sector was due to a rise in new construction, while ownership transfer costs declined in line with the increase in resale activity.

Business investment drop on the quarter, subtracting 1.9pp to growth. The details show a decrease in machinery and equipment investment (-14.4% q-o-q ar., reducing growth by 0.5pp), mainly due to a lower investment on aircrafts and other transportation equipment. Investment in non-residential structures decreased 7.7% q-o-q ar., reducing growth by 0.6pp as a result of a decline in engineering structures due to the near completion of the Kitimat liquified natural gas project.

The external sector was a major drag on growth, subtracting 1.5pp to growth. Exports of goods and services declined 5.1% q-o-q ar. in Q3, removing 1.7pp from growth. Exports of good, especially refine petroleum products, was the main source of decline in the sector (contributing -1.7pp to growth), while exports of services were flat on the quarter.

Imports decreased 0.6% q-o-q ar., adding 0.2pp to growth. The decline was led by y declines in clothing, footwear and textile products, transportation services, and electronic and electrical equipment and parts, while motor vehicles and parts imports increased.

Canada’s terms-of-trade improved for the first time since the second quarter of 2022 (+4.0% q-o-q) mainly as a result of higher commodity prices and other export goods.

On the income side, household disposable income rose by 1.0% q-o-q. The higher disposable income was mainly due to an increase in compensation of employees (+1.3% q-o-q). Real disposable income is estimated to have increased by a meagre 0.2% q-o-q in Q. 3

With the increase in disposable income, while consumer spending was essentially flat, the household saving rate climbed to 5.1% from 4.7%.

The monthly GDP for September increased by 0.1% m-o-m (+10.6% y-o-y). The preliminary estimate suggests that activity likely increase 0.2% in October.

The goods-producing sector rose 0.3% m-o-m (-2.1% y-o-y). The increase was mainly due to higher activity in contraction and manufacturing, while activity declined in natural resources extraction and agriculture.

The service sector was flat on the month (+1.5% y-o-y). Lower activity in real estate, finance and insurance and arts, entertainment and recreation were the main source of weakness. These were partly offset by increases in wholesale trade.

For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The drop in the activity level on the month in oil and gas extraction and support activities and in agriculture suggests activity in the province likely underperformed the rest of the country.

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Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.