By Promit Mukherjee
OTTAWA (Reuters) – Canadian gross domestic product in the third quarter is likely to fall well short of the Bank of Canada’s forecast, possibly coming in at less than half the estimate, with growth flagging and joblessness still rising, economists said this week.
In July, the BoC had forecast Canada’s annualized GDP in the third quarter would grow by 2.8%, led by falling borrowing costs, growth in exports and increase in household spending.
Economists’ lower expectations for growth reflect constrained consumer spending in recent weeks and the difficulty of Canada’s growing ranks of immigrants to find jobs.
A slide in growth projections, especially if substantial, could force the central bank to make larger interest rate cuts than previously envisioned to prevent the economy from slipping into recession in the coming quarters, according to a half dozen economists interviewed by Reuters.
“I think it’s looking less likely that the Bank of Canada’s Q3 projections are actually going to take hold,” said Andrew DiCapua, a senior economist at Canadian Chamber of Commerce.
In the third quarter ending Sept. 30, Canada will probably record gross domestic product growth of around 1% to 1.5% on an annualized basis, DiCapua said, adding it looked more likely that the bank would be making deeper cuts.
A slew of disappointing economic indicators coming from Statistics Canada on GDP and the labor force have pushed economists to update their models.
Last month, Statscan said economic growth in June was flat and is likely to be unchanged for July. The labor force survey last week showed that unemployment hit 6.6% in August, a seven-year peak, excluding the pandemic period. The number of hours worked by employees in August also contracted, hitting income levels.
“We have seen months and months for now that essentially the labor market has flattened out, no growth,” said Pedro Antunes, chief economist at Conference Board of Canada, an independent think tank.
“That’s suggesting a very weak growth for Q3,” he said, adding that bank’s forecast could fall short by half or more.
Household spending in Canada, which contributes 57% to the GDP, slowed to 0.2% in the second quarter as higher interest rates put a damper on consumer purchases. High mortgage costs and rent increases have eaten into disposable incomes.
Population growth at a faster rate than economic expansion also bloated unemployment numbers, with a tepid economy failing to absorb a huge influx of immigrants. That dynamic has put pressure on growth, with per capita GDP contracting for five quarters in a row.
DOWNSIDE RISKS
Bank of Canada Governor Tiff Macklem conceded last week that while the bank said it saw growth strengthening, there were some downside risks to the expected pick-up.
The BoC, after keeping its key policy rate for over two-decade high of 5% for a year, trimmed it by a quarter point three times in a row since June, bringing it down by 75 basis points to 4.25%.
David Doyle, head of economics at Macquarie, said the jobs data reinforces the risks to BoC’s growth outlook and the potential for a 50 basis point rate cut in October.
The central bank is also likely to be wrong with its outlook on the output of the Trans Mountain Expansion (TMX) pipeline and growth and vehicle exports, said Randall Bartlett, senior director of Canadian economics at Desjardins.
The bank had said in its monetary policy report from July that export growth is expected to rise over the second half of the year, led by TMX and motor vehicle exports which would boost GDP.
“We really think the Bank of Canada was overly optimistic in those two sectors in particular,” he said.
Desjardins is tracking a third quarter GDP of 1% against the central bank’s 2.8% forecast, Bartlett said.
(Reporting by Promit Mukherjee in Ottawa; Editing by Frank McGurty and Aurora Ellis)