Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud
Bottom line
The Canadian economy saw a rebound in activity in Q3 after a contraction in Q2. The details show that the rebound resulted from continued normalization in consumption patterns, as restrictions to slow the spread of COVID-19 are lifted. As such, the rotation in consumer spending from durable goods and renovation towards services shouldn’t be a surprise and is likely to continue. Moreover, the continued robust increase in disposable income and high saving rates suggest that households have the means to continue spending.
Nevertheless, the details show that, after being the main engine of growth, activity in residential investment is normalizing and continues to be a significant drag to growth. Similarly, there are signs that supply chain disruptions are holding back the economy, notably the manufacturing sector.
We expect economic activity to remain robust in the coming quarters, supported by continued normalization in household consumption patterns. How strong growth in the sector will depend on households’ willingness to spend the money saved during the pandemic and how quickly disposable income will return to its pre-pandemic trend.
The Canadian economy bounced in the third quarter of 2021, surging by 5.4% quarter-over-quarter annual rate (ar) (+3.9% year-over-year). This followed a drop of 3.2% quarter-over-quarter ar. in the second quarter of 2021. As a result, economic activity stands 1.4% below its pre-pandemic level at the end of the summer.
In terms of details, a large proportion of the rise in economic activity can be attributed to normalization in consumer spending, while an increase in net exports also supported growth on the quarter. On the other hand, a decline in residential investment and inventories were the main drag on economic activity.
Household spending jumped by 17.9% quarter-over-quarter ar., it’s the second strongest increase on record, contributing only 9.1 percentage points (pp) to growth. This followed a small contraction in the second quarter. The surge in consumer spending was the result of normalization in consumption patterns following the easing of many of the restrictions on economic activity. As such, spending on services, especially transport services, food and accommodation and personal care, rose 6.3% quarter-over-quarter in Q3, contributing 7.2pp to growth. Consumption of goods increased by 1.8%, mainly as a result of an increase in purchases in clothing and footwear, while spending on durable goods continued to normalize.
Residential investment dropped by 31.3% quarter-over-quarter ar., reducing growth by 3.7 pp. The decline in activity was broad-based, with lower activity in construction, renovation and resale activity. The drop in new construction was the biggest since 2009. The decrease in resale activity was a return to a more normal level after a record level of activity earlier in 2021. The reduction in renovation is the result of households normalizing their spending patterns, diverting spending towards services as a result of the loosening of restrictions on many activities like travelling and dining out.
Business investment excluding housing was mostly flat on the quarter. Business investment in machinery and equipment decreased a meagre 0.7% quarter-over-quarter ar. and by 1.1% quarter-over-quarter ar. for investment in non-residential structure.
Business inventories reduced growth by 3.0pp in the third quarter, likely due to strong demand and difficulty to keep stock levels due to supply shortage of many goods.
The external sector supported growth in the third quarter, adding 3.1pp to growth. Exports increased 8.0% quarter-over-quarter ar. in Q3, led by a rise in exports of energy products, especially oil, and increases in motor vehicles and parts, and metal ores. On the other hand, imports declined 2.3% quarter-over-quarter ar. partly as a result of continued supply chain woes.
Canada’s terms-of-trade deteriorated slightly in Q3 (+4.2% quarter-over-quarter) as import prices increased at a faster pace than export prices. Despite the decline, the terms-of-trade remains close to a record high, providing a boost to income growth on the quarter. This impact of the terms-of-trade on income will positively affect Alberta and other oil-producing provinces.
On the income side, household disposable income increased by 1.8% quarter-over-quarter. The rise in disposable income was due to a rise in employees’ compensation (+2.9% quarter-over-quarter) as more people returned to work. Government transfers decline slightly (-1.6% quarter-over-quarter) due to a reduction in the number of households receiving COVID-related benefits. With consumer spending growing faster than disposable income, the household saving rate inched lower to 11.0% from 14.0%, still well above its pre-pandemic level.
The monthly GDP for September increased by 0.1% month-over-month (+3.4% year-over-year). The detail shows 12 of 20 industrial sectors posted gains in September.
Nevertheless, the level of economic activity remains 1.4% below its pre-pandemic level. Only 8 out of 20 industrial sectors have economic activity above pre-pandemic levels, while others, like the food and accommodation, remain more than 30% below their pre-pandemic level. Nevertheless, the preliminary estimate for October suggests that activity likely rose by 0.8% month-over-month.
The goods-producing sector decreased 0.6% month-over-month (+1.4% year-over-year), led by reductions in activity in manufacturing, construction utilities and agriculture. These declines were somewhat offset by an increase in mining, oil ad gas. The service sector increased by 0.4% month-over-month (+4.2% year-over-year). Most services industries saw an increase, led wholesale trade, professional, scientific and technical services, education, other services, and public administration. On the flip side, there were declines in retail trade, management companies, and accommodation and food services.
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 level of activity increased on the month in oil and gas extraction, support activity for the mining, oil and gas sector and oil pipeline transportation. However, activity in the agricultural sector declined. Overall, it suggests activity in the province was likely only marginally higher in September.
The continued high level of the terms-of-trade in Q3, as oil prices remain high, suggests continued support to income growth for both individuals and businesses in Alberta. This is in line with our observation that the value of the oil produced in Alberta is reaching record levels.
Independent Opinion
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