Canadian Economy Expanded 0.6% In Q3

Canadian GDP grew just 0.6% annualized in the third quarter of 2012, two ticks below consensus expectations. Compounding the bad news was the one-tick downward revision to Q2 growth to 1.7%. In Q3, domestic demand was restrained as weakness in investment, government spending, and residential construction offset healthy gains in consumption spending (top chart).

Consumers financed the increased spending thanks to better disposable incomes, although they also dipped into their savings as the savings rate fell three-ticks to 3.9% (middle chart). Trade was a massive drag on Q3 growth (the 7.8% contraction in real exports is the worst since the 2009 recession), not surprising given the weak global economy in Q3. For the third quarter in a row, inventories helped boost GDP (final sales were actually down 1% in Q3).

The monthly GDP data showed flat output in September. Manufacturing, construction and retailing saw small gains which offset output declines in the energy sector among others. For Q3 as a whole, the goods sector contracted sharply as resources in particular took a beating from the global slowdown. The resilience of the services sector helped cushion the blow in the quarter (bottom chart).

OPINION: The Q3 GDP report was very weak in the headline but more so in the details, with much of the growth coming from inventory accumulation. The latter is a clear negative for production ahead. With Q3 growth coming in well below the Bank of Canada's 1% estimate and the downward revision to the prior quarter, the output gap is now even larger than what the BoC expected. While the central bank expects growth to bounce back in Q4 (+2.5%), we're less optimistic, more so with the weak handoff from September.

The global economy is still in a funk (based on the PMI readings worldwide in early Q4), a clear negative for our exporters, while domestic demand could be restrained by a weakening housing sector, and tepid investment from both the private sector and government (more so with the latter's aim to balance the budget sooner rather than later).

Moreover, consumption spending which regained some vigour in Q3 now face challenges brought by a softer labour market, a mounting debt load, less favourable housing wealth effects and fiscal retrenchment in the large provinces. All told, Canadian GDP growth is likely to remain below potential for the next little while.

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