Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Today’s release of the monthly GDP confirms that the momentum in the Canadian economy remains weak going into the second half of 2023. As such, with the preliminary estimate for September suggesting activity was flat, growth in the third quarter will likely contract slightly in Q3 for a second quarter in a row, meaning a mild technical recession.
While many temporary factors have affected the Canadian economy (strikes in many sectors and forest fires), blurring somewhat the underlying economic activity, it is clear that the economic momentum is weak. Interestingly, many sectors linked to consumer discretionary spending, namely accommodation and food services, and real estate, continue to underperform, showing that household spending is weakening in reaction to higher interest rates.
As we have written in the past (see What happened to the recession? The role of the policy stance and demographic), the full impact of the rise in interest rate is likely to be felt in early 2024. As such, we should expect growth to continue to weaken in the coming months. Whether the Canadian economy experiences a soft landing or a hard landing will depend on the labour market, given the amount of household debt.
The Bank of Canada will welcome the slower momentum, as it suggests excess supply may be building up in the economy. Already, the BoC has been saying that there is clear evidence that higher rates are slowing spending and we believe that the BoC is done with raising its policy rate. Nevertheless, with wage growth remaining elevated, potentially leading to stickier inflation, the BoC is likely to continue to leave the door open to further rate hikes if necessary.
For Alberta, the details available in the report suggest that economic activity likely outperformed the rest of the country in August due to a continued rebound in activity in the oil and gas sector after being affected by the forest fires and its impact on related sectors. High energy prices remain a tailwind to the Alberta economy this year, but not as much as in the past (see Where’s the boom? How the impact of oil on Alberta may have permanently weakened). Moreover, continued strong population growth in the province continues to push economic activity higher.
The monthly GDP was flat in August (+0.9% y-o-y), weaker than expectations. The details show that 8 out of 20 industrial sectors posted gains on the month. Despite the overall economy being 3.4 percentage points above its pre-pandemic level, 8 out of 20 industrial sectors still have economic activity below their pre-pandemic levels, namely agriculture, utilities, construction, transportation and warehousing, management of companies, administration and support services, arts, entertainment and recreation, and accommodation and food services.
Statistics Canada’s preliminary estimate suggests GDP was once again flat in September. This suggests that growth in the third quarter of 2023 should be around -0.1% q-o-q ar., a second quarter in a row, meaning a mild technical recession.
The goods-producing side of the economy decreased by 0.2% m-o-m in August. Economic activity declined in manufacturing (-0.6% m-o-m), agriculture (-3.2% m-o-m) and utilities (-1.0% m-o-m). Continued expansion in natural resource extraction (+1.2% m-o-m), with gains over the past months fully reversing the impact of the forest fires, partly offset these declines, while construction was flat on the month.
The services-producing side of the economy rose 0.1% in August. The increase in activity was mainly driven by wholesale trade (+2.3% m-o-m), transportation and warehousing (+0.8% m-o-m), as the industry normalized after the port strike, and finance and insurance (+0.4% m-o-m). Declines in retail trade (-0.7% m-o-m), a third consecutive monthly decline, and accommodation and food services (-1.8% m-o-m) were the main drag to activity in the services sector.
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 in the oil and gas and pipeline sectors continued to improve, as production in the sector is now above where it was in April before being affected by the forest fires in the province. A decline in agriculture, the eleventh consecutive contraction, and in farm product and petroleum product wholesalers likely held back growth somewhat in August. Overall, this means that the province’s economy likely slightly outperformed the rest of the country in August.
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