Mixed economic data offers glimpse of the future

By: Theo Argitis, Managing Director

The latest Canadian GDP and jobs data released by Statistics Canada this week painted a mixed picture of the nation’s economic health, but also offered a glimpse of what a best-case outcome could look like in the face of serious global and domestic headwinds.  

Quarterly economic activity figures released on Tuesday showed the nation is feeling the strain from rising interest rates.

Household consumption measured in volume terms — a more accurate measure of spending because it adjusts for price increases — fell in the three months that ended in September. That’s a rare contraction in consumer spending that typically only happens during recessions.

Purchases of expensive big ticket items such as cars are being hit hardest, while Canadians are also saving more. Consumers are clearly becoming more skittish as home values shrink and borrowing costs rise. 

But the numbers also show businesses have been stepping in to fill the gap. Export volumes have surged, while non-residential investment has been robust, surpassing pre-pandemic levels. Businesses also have been restocking their inventories, which is a sign of confidence.

Energy is driving the increase in both exports and investment, with Statistics Canada citing specifically the increased spending at the new liquefied natural gas export terminal in Kitimat, along with wind turbines in Alberta. Yet, it’s also broad-based. Growth in exports of services, for example, has been keeping up. 

International trade, non-residential capital spending and inventory accumulation more than offset weakness in consumption and housing investment in the third quarter. This is why the nation’s economy was able to expand at an annual pace of just under 3 per cent during the period, twice the pace expected by economists.

Over the past year, corporate Canada has been responsible for about two-thirds of all growth — based on trade, investment and inventory metrics — which is a lot historically.

How much of that activity Canada’s businesses can sustain will in large part determine how fast the economy will be able to grow over the next little while.

But the pain for households is only just beginning.

The Bank of Canada is expected to continue its rate hiking cycle next week (Dec. 7) and within a few weeks, prime rates offered by commercial banks could be hovering near 6.5 per cent, versus near 2.5 per cent earlier this year. Even if rates don’t move up by too much from here, borrowing costs will remain elevated for some time, acting as a major drag on consumer spending and confidence.

There will be a lot of heavy lifting for corporate Canada to do.