Disappointing Details Of 2018 Q3Canadian Real GDP

Canadian real GDP advanced by 2.0% q/q saar in 2018 Q3, matching market consensus and very close to the Bank of Canada’s October Monetary Policy Report projection of 1.8%.

This being said, the breakdown of real GDP’s major components reveals weak spots. Final domestic demand – the sum of household spending, business investment, stock accumulation and government spending – stalled for the first time since 2016 Q1. Net exports positively contributed to real GDP growth but partly for the wrong reasons: exports rose slightly (+0.9% q/q ann.) and imports declined significantly (-7.8% q/q ann.).

The most discouraging news is the decline in M&E business investment (-9.9% q/q ann.) and non-residential building investment (-5.4% q/q ann.) observed during 2018 Q3. The moderation in consumer spending growth, to a 11-quarter low of 1.2% q/q annualized, is less surprising due to the increase in interest rates and deceleration in nominal household income growth (+3.0% q/q ann.). Housing activity also declined for the fifth time in the last six quarters (-5.9% q/q ann.). Precisely, a major pullback in homebuilding and renovation spending more-than-offset the ongoing rebound in resale market transactions. Also, to a lesser extent than in the U.S., expansionary fiscal policy in Canada allowed government spending to increase for the eighth consecutive quarter (+1.8% q/q ann.).

All in all, the pace of real GDP growth eased from 2.9% q/q annualized in 2018 Q2 to 2.0% in 2018 Q3. The 0.1% m/m contraction in real GDP during September (below the market consensus of a 0.1% m/m gain and our 0.0% estimate) and the decline in Canadian prices signal further loss of momentum. The BoC’s real GDP growth 2018 Q4 forecast (+2.3% q/q ann.) appears fairly high in our view.

The fading economic momentum rules out the possibility of a 25-basis-points hike at the Dec. 5 monetary policy meeting. We expect the overnight rate target to stay at 1.75%. The BoC could also delay its next hike after the Jan. 9 meeting, depending on the outcome of today’s G20 summit and next week’s OPEC meeting.

First, investors will find out this weekend if the U.S. goes ahead with the 25% tariffs scheduled for Jan. 1 towards China. A delay in tariff increases is among the possible scenarios. The low-probability scenario is a comprehensive agreement between the two countries leading to the termination of existing tariffs and non-tariff barriers.

Second, it remains to be seen if the increasing global oil supply will prompt OPEC and non-OPEC countries to announce production cuts on Dec. 6th. Negative outcomes at these two major events would likely prevent the BoC from hiking its policy rate in 2019. Positive outcomes would likely allow the BoC to increase the overnight rate target by 25 basis points twice next year.

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