Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line:
The economy grew roughly in line with expectations in the third quarter of 2024 at 1.0% q-o-q ar. The details show that the strength in domestic demand was mainly the result of household spending and government spending, while business investment and net exports were a drag.
Consumer spending showed a notable improvement in Q3, contributing 1.8pp to growth. However, while spending per capita increased on the quarter (+0.2% q-o-q), population growth remains a significant source of growth. As such, we estimate that if population growth was the same as pre-pandemic, the economy would have contracted by 0.2% q-o-q ar. (see Mid-year outlook: It’s a “Me-cession”, not a recession for details)
The increase in spending per capita can be traced to an improvement in households purchasing power. As such, disposable income rose by 2.3% q-o-q in Q3, and we estimate that real disposable income per capita increased by 1.0% q-o-q, which is the biggest increase since the pandemic. Nevertheless, real disposable income per person is 4.5% below its pre-pandemic trend, explaining why households feel poorer. The saving rate also rose on the quarter and is reaching its highest level since 1996 if the pandemic is excluded, suggesting that households continue to be cautious with their spending and higher interest rates are making saving more attractive.
With the preliminary GDP estimate suggesting that economic activity increased only marginally in October, growth is expected to be modest in the fourth quarter, slightly above 1.0% q-o-q ar.
Today’s GDP confirms that the Canadian economy remains weak, with most of the growth coming from the government sector and population growth. There are signs of marginal improvements on the household side, with spending and real disposable income per capita. Growing individual spending will be needed to offset the slower population growth next year, especially since growth would have been negative in Q3 without population growth. However, the weakness in business investment, especially machinery and equipment, could signal some poor business confidence, while the lack of growth on the export side suggests that Canada has a hard time capitalizing on strength in the US economy.
Nothing in this report would prevent the BoC from cutting its policy rate in December. While we continue to think that the policy rate should be returned rapidly to neutral, the uncertainty created by the GST holiday and the marginal improvement in the household sector could tilt the BoC into cutting by 25bp.
Canadian economic activity rose by 1.0% q-o-q annual rate (ar) in the third quarter of 2024 (+1.6% y-o-y), as expected. This followed an upwardly revised increase of 2.2% q-o-q ar. in the second quarter of 2024 (originally reported as +1.7% q-o-q ar.).
In terms of details, increases in household spending (contributing +1.2 percentage points (pp) to growth) and government spending (contributing 0.7pp) were the main sources of growth on the quarter. There was also some marginal support from residential investment (contributing 0.2pp).
These increases were partly offset by a decline in business investment with weaker (subtracting 0.7pp to growth) and net exports (subtracting 0.1pp to growth).
Final domestic demand increased robustly in Q2, contributing 1.5pp to growth in Q3, slightly better than in Q2.
Household spending increased by 3.5% q-o-q ar, contributing 1.2pp to growth. This followed a meagre 0.9 q-o-q ar. in Q2 of 2024. The strong increase in consumer spending was the result of higher spending on both goods (+4.2% q-o-q ar.) and services (+2.9% q-o-q ar.), driven by strong spending on motor vehicles and financial services.
Residential investment increased by 3.0% q-o-q ar., adding 0.2pp to growth. However, the higher activity was entirely driven by stronger and homeownership transfer costs (housing transactions), while activity in both new construction and renovation eased in Q3.
Business investment on the quarter, subtracting 1.1pp to growth. The details show a sharp decline in machinery and equipment investment (-27.7% q-o-q ar., subtracting 1.1pp to growth) that was mainly due to the reversal of some temporary strength in higher spending on aircraft and other transportation equipment and parts in Q2. Investment in non-residential structures increased 0.2% q-o-q ar., barely adding anything to growth.
The external sector was a drag on the economy in Q3, subtracting 0.5pp to growth. Exports of goods and services declined 1.1% q-o-q ar. in Q3, subtracting 0.3pp to growth. Exports of goods decreased by 0.1% q-o-q ar. while exports of services dropped 4.5% q-o-q ar. Lower exports of gold, motor vehicles, and travel services were the main reason for the decline, while an increase in exports of crude oil offset some of the weaknesses.
Imports decreased 0.4% q-o-q ar., adding 0.1pp to growth. Lower imports of motor vehicles and other transportation equipment led to the decline in Q3.
Canada’s terms-of-trade deteriorated slightly in Q3 (0.5% q-o-q) mainly because of a stronger increase in import prices while export prices decline. Compared to its peak in 2022, the terms-of trade declined by 11%, mainly due to a decline in commodity prices.
On the income side, household disposable income rose by 2.3% q-o-q. The higher disposable income was due to an increase in compensation of employees (+1.7% q-o-q). Real disposable income is estimated to have increased by 1.7% q-o-q in Q3. With a bigger increase in disposable income than in consumer spending, the household saving rate increased to 7.1% from 6.2%, which is the highest since 1996 if we exclude the pandemic.
Adjusted for population, real disposable income per capita rose by 1.0% q-o-q in Q3, it biggest increase since the pandemic. Nevertheless, it is only 1.9% above its pre-pandemic level and about 4.5% below its pre-pandemic trend.
The monthly GDP for September inched higher by 0.1% m-o-m (+1.6 % y-o-y), weaker than expected. Moreover, the preliminary estimate suggests that activity rose 0.1% in October.
The goods-producing sector declined 0.3% m-o-m (+0.1% y-o-y). Declines in natural resource extraction and manufacturing were only partly offset by higher activity in construction, agriculture, and utilities.
The service sector increased 0.2% m-o-m (+2.1% y-o-y). Higher activity in retail trade, wholesale trade, transportation and warehousing and real estate were the main sources of growth and were partly offset by weakness in professional, scientific and technical services, and other 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 sharp decline in oil and gas extraction and pipeline industry suggests that growth in the province meaningfully underperformed the rest of the country.