Canadian economy shrank in Q3 but manages to ‘keep its head above recession waters’

The Canadian economy shrank in the third quarter amid weak business and consumer spending as well as lower exports.

Statistics Canada released its gross domestic product report Thursday, which shows the economy contracted 1.1 per cent on an annualized basis.

The federal agency says a decrease in international exports and slower inventory accumulation by businesses were partially offset by increases in government spending and housing investment.

It also revised up its reading for real gross domestic product in the second quarter, noting the economy did not shrink, but rather grew 1.4 per cent on an annualized basis.

While the decline in the third quarter is essentially offset by growth in the second quarter, economists reacting to the new data say the trend is clear: the economy is teetering.

“The big picture is that the Canadian economy is struggling to grow, yet managing to just keep its head above recession waters,” wrote BMO chief economist Douglas Porter in a client note.

The federal agency says new housing construction in the third quarter increased for the first time since early 2022, led by apartment construction.

Bank of Canada interest rate hikes have been putting pressure on consumer and business spending as they both face higher borrowing costs.

Thursday’s report shows consumer spending continues to be flat for a second consecutive quarter.

Households are instead saving more as disposable income surpassed the rise in nominal spending.

The report says government transfers, namely the doubling of the GST rebate in the summer, propped up incomes as the labour market weakened.

Meanwhile, business capital investment fell by two per cent in the third quarter.

Statistics Canada’s preliminary estimate for real GDP suggests the economy grew by 0.2 per cent in October, following a 0.1 per cent increase in September.

The central bank is set to announce its next interest rate decision on Dec. 6, after choosing to hold its key rate steady at five per cent at its last two announcements.

Economists widely expect the Bank of Canada to remain on hold as inflation slows and the economy weakens.

“Today’s mixed report reinforces the point that the Bank is done hiking rates, but doesn’t really advance the cause for rate cuts, as the economy isn’t showing signs of further deterioration early in Q4,” Porter said.