Canadian economic growth decelerates to 2 pct in Q3 2018

Canadian economic growth decelerated in the third quarter. On a quarterly basis, the Canadian economy expanded 2 percent, a slowdown from 2.9 percent seen in the prior quarter. Today’s result is widely consistent with market expectations. Sound price gains, markedly for exports and business investment, aided in sending nominal GDP growth to 5 percent.

The headline growth was mainly driven by international trade again this quarter. On the contrary to the prior period, it was less about export strength and more about softness in import. Subdued imports were mainly due to large contractions in refined energy products as well as aircraft and other transportation equipment. With imports down, less production went into inventories, with this category negatively contributing 1.3 percentage points from growth, noted TD Economics in a research report.

Meanwhile, consumer spending eased in this quarter, as overall household consumption rose only 1.2 percent, owing to durable goods spending that dropped 2.7 percent. This is because Canadians purchased fewer vehicles for a third consecutive quarter.

A noticeable decline of non-residential business investment was the biggest surprise in today’s report. Investment in non-residential structures dropped 5.2 percent, while machinery and equipment spending fell 9.8 percent. In spite of a noticeable rebound in sales activity, residential investment dropped 5.9 percent as both new construction and renovation activity dropped.

Meanwhile, compensation of employees rose 2.7 percent, leaving overall wage gains over the quarter at a moderate 2.2 percent year-on-year. The household savings rate rose to 4 percent from an upwardly revised 3.4 percent in the first quarter.

Looking at today’s report, the headline appears to have matched expectations; however, the details have disappointed. It was barely an encouraging sign when the bulk of the growth comes from a contraction of imports, leaving final domestic demand negative for the first time since the start of 2016.

Today’s report was more or less in line with Bank of Canada’s expectations, at least for the headline, but will likely have less bearing than normal on their deliberations, said TD Economics in a research report.

“We expect the resulting production cuts to hit Q4 growth, with a full recovery not expected until at least mid-2019. This creates a risk to the outlook which means that not only is December's decision bound to be a hold, odds are January 2019 will see a pause as well. That the details of today's report are so soft only serves to reinforce this view”, added TD Economics.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral at 0.751949, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 75.3314. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex