GDP Growth Nowcast Edges Lower, Signalling Strong Headwinds to Come
GrowthNow: A Real-Time Forecast of Canada’s Economic Growth
November 13, 2023
Key Trends
- Most indicators are pointing toward a slowdown in economic activity. As a result, our nowcast estimate for 2023Q3 real GDP growth trended downwards throughout October, eventually indicating a decline of 0.15 per cent quarter-over-quarter (a decline of 0.6 per cent annualized).
- Real GDP by industry in August remained unchanged for the second consecutive month, as elevated interest rates and inflation continued to restrain economic activity. Preliminary September indications suggest the same. Output gains were observed in mining and oil and gas extraction as well as wholesale trade. Meanwhile, output declined in manufacturing, agriculture, and forestry. Overall, declines were recorded in 12 out of 20 industries.
- The Canadian economy added 64,000 jobs in September, with most of the growth concentrated in part-time work. The number of public-sector employees and self-employed workers increased, while private-sector employment remained unchanged. The unemployment rate held steady at 5.5 per cent for a third consecutive month.
- Retail sales declined 0.1 per cent in August. Sales were down in six of nine subsectors, though the most notable decline was seen at motor vehicle and parts dealers. Meanwhile, gasoline stations and fuel vendors observed the largest increase in retail sales. In volume terms, retail sales were down 0.7 per cent.
- Canadian manufacturing sales increased by 0.7 per cent in August, driven by higher sales in petroleum and coal, food, and machinery subsectors as well as higher prices. However, adjusted for inflation, manufacturing sales declined 0.7 per cent. Total inventories edged 0.1 per cent lower in August, largely because of lower inventories of chemical products and primary metals.
- In August, Canada’s merchandise exports rose 5.7 per cent, while imports increased by 3.8 per cent. As a result, the national trade balance shifted from a $437 million deficit in July to a surplus of $718 million in August. It’s worth noting that prices had a significant impact on trade—in volume terms, exports and imports increased by 3.0 per cent and 1.2 per cent, respectively.
- Canadian consumer confidence dropped in October, marking three consecutive monthly declines. Our most recent release revealed an increase in the proportion of respondents holding pessimistic views regarding the state of their current and future finances. This uptick in pessimism can be attributed to higher borrowing costs and elevated prices.
Insights
- Year-over-year price growth decelerated to 3.8 per cent in September, but inflation expectations remain elevated. With inflation hovering stubbornly above the Bank of Canada’s target range, interest rates could stay elevated for an extended period of time, which would weigh down medium-term economic growth. According to our latest inflation expectations survey, 53.0 per cent of respondents believe that inflation will be above the Bank of Canada’s target range over the next year, indicating that some consumers may perceive inflation as higher than it actually is or may be questioning the Bank’s ability to bring inflation down to target. Furthermore, households holding mortgages will likely face more substantial obstacles in the coming months compared to those who carry less debt. With only about a third of mortgage holders having renewed their mortgages at higher rates, there are many more who may have to do the same in the near future. More households with higher monthly mortgage costs could lead to weaker household spending on goods and services.
- Our most recent nowcast for quarterly GDP growth indicates that the Canadian economy has reached a standstill, mirroring economic trends observed both domestically and internationally. Elevated household debt levels, combined with inflation and higher interest rates, are placing a heavy burden on households. Consumer confidence is down, while recession fears are on the rise. The fiscal situation in Canada also presents its own set of challenges. Governments at all levels are trying to keep spending down. Beyond our borders, uncertainty clouds the global economic picture. While the U.S. economy has thus far weathered the impact of rising interest rates, weak economic conditions in Europe and China could hinder Canadian economic growth.
We utilize a mixed data sampling (MIDAS) regression model—introduced by Ghysels, Santa-Clara, and Valkanov (2004)—intended to forecast Canadian real GDP growth. This approach enables us to model low-frequency variables as a function of high-frequency variables and their lagged terms.
On the release of National Accounts data for the previous quarter, we begin nowcasting GDP growth for the current quarter. We will update our nowcast estimates every time there is a major data release for the variables included in our model.
We use monthly frequency variables that include GDP at basic prices, retail sales, manufacturing sales, inventories, employment, the national trade balance, consumer confidence, and commodity prices. We only incorporate one quarterly variable: GDP at market prices, lagged by one quarter.
Whenever we update the model to account for new data, some high-frequency variables and their lagged terms may be removed from the model, depending on which combination of variables produces the lowest Akaike information criterion.
All nominal variables are adjusted for inflation before we calculate the one-period percentage change. We use growth rates for all variables and their lagged terms as inputs. Our approach does not provide a breakdown of the components of GDP; rather, the model produces an estimate of GDP growth for the current period.
Our nowcast estimate will likely change as we incorporate updated and/or revised data for the indicators included in our model. We are also continuously looking to improve our nowcast results, which may prompt us to revisit our model approach in the future. The nowcast results will be published monthly.
Related research
For a more detailed analysis of Canada’s economic outlook, check out our Canadian Five-Year Outlook.
Disclaimer: Forecasts and research often involve numerous assumptions and data sources and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal, or tax advice.