Weekly Economic Watch - November 29, 2013‏

– Real GDP grew 2.7% annualized in the third quarter of 2013, two ticks higher than consensus expectations which were at just 2.5%. However, the prior quarter was downgraded one tick to +1.6% (previously reported as +1.7%). In Q3, the economy was supported by domestic demand which more than offset the drag from trade, the latter chopping 0.2% from growth (with real exports dropping and imports rising in the quarter). Helping support domestic demand was consumption spending growth which expanded at an annualized pace of 2.2%. That’s, however, a moderation from the prior quarter’s pace of consumption. It seems consumers opted to save part of their higher real disposable incomes (which grew 2.4% annualized) as evidenced by an uptick in the savings rate to 5.4%. Also supporting domestic demand was government and residential construction which both continue to defy expectations, while business investment also contributed to GDP after acting as a drag in the prior quarter. With production growing faster than sales, stocks piled up in Q3, with inventories contributing 1.2% to growth. Nominal GDP grew 5.6% annualized, the biggest increase since 2011Q4.

Looking ahead to Q4, the outlook isn’t particularly bullish considering the apparent deceleration in the US economy in the final quarter of the year. Moreover, there was some inventory accumulation on both sides of the border in Q3, which suggests a moderation in production ahead. Still, given the excellent handoff from September, Canada may be able to manage growth of around 1-1.5% in the final quarter. If that’s the case, then the growth rate for 2013 may end up at around 1.7%, one tick above the Bank of Canada’s estimate for the year.

The current account, the broadest measure of trade, showed the deficit narrowing to C$15.5 billion in the third quarter of 2013. The improvement in the deficit was made possible by narrowing deficits on all of the major components of the current account, i.e. goods, services, and investment income. Overall, the C$15.5 billion deficit amounts to 3.3% of GDP. The current account deficit was financed in Q3 primarily by portfolio inflows but also by foreign direct investment, although the latter inflows softened a bit from the prior quarter’s pace.

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