There was a distinct moderation in Canadian economic growth in the third quarter of 2019 following a stunning 3.8% annual growth rate recorded in the second quarter.

Canada’s economy expanded at a 1.3% real annual rate in the third quarter, a deceleration in growth which was widely expected. The year over year pace of 1.7% as of the third quarter was only slightly below Canada’s assumed steady-state benchmark growth rate.

Nonetheless, virtually all of Canada’s domestic demand components expanded strongly in Q3, including consumer spending up 1.3%, residential investment 13.3% and business investment 9.5%. Final domestic demand rose at a robust 3.2% annual rate in the third quarter.

Foreign trade was a drag on the economy in the third quarter, as exports declined sharply, and imports remained roughly flat. Shrinking inventory levels also subtracted from the Canadian economy in Q3, as was the case in the previous quarter.

However, the drawdown of inventories over the last two quarters suggests growth could also get a boost from restocking in early 2020.

At the industry level, the overall economy increased 1.6% over twelve months as of September, though manufacturing production was down 0.7% and mining/oil and gas also contracted 6.1%.

On a month to month change basis, real GDP increased an identical 0.1% over each of the last three months, so the three-month 1.2% annual rate of change was much less than the twelve-month gain.

All in all, there were very few surprises in the recent Canadian national account figures. Growth in the third quarter, and indeed over the past year has come in slightly below the usual measures of potential growth.

However, on the positive side, the increase in domestic demand in Q3 was encouraging, and in fact, a large share of the increase was due to the strength of business investment spending. Indeed, it seems that Canadian businesses are back into spending mode.

The Bank of Canada has recently separated itself from its international peers by keeping its key interest rate steady in 2019, while others have moved to lower rates and increased economic stimulus in response to a weakening global economy.

 Nonetheless, the latest GDP and the shockingly poor employment numbers in November do not alter our view that the Bank of Canada will continue to hesitate providing the economy with any additional monetary stimulus.

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