GDP Growth Nowcast Remains Flat Throughout September
GrowthNow: A Real-Time Forecast of Canada’s Economic Growth
Key Trends
- Our nowcast estimate for 2023Q3 GDP growth edged slightly down below zero to settle at –0.04 per cent (quarter-over-quarter) at the end of September, implying that the Canadian economy will likely continue to stagnate.
- The latest reading of real GDP by industry, from July, remained essentially unchanged, following a decline of 0.2 per cent in June. The manufacturing sector recorded the most significant contraction among all industries, with a decline of 1.5 per cent. On the other hand, sectors like accommodations and food services, as well as mining and quarrying (excluding oil and gas), rebounded after being impacted by wildfires in June. Overall, nine out of 20 industrial sectors recorded gains in July.
- Retail sales rose by 0.3 per cent in July. Sales were up in seven of nine subsectors, mainly due to an increase in sales at food and beverage retailers. Meanwhile, sales at motor vehicle and parts dealers fell for the first time in four months. In volume terms, retail sales were down 0.2 per cent.
- Canadian manufacturing sales increased by 1.6 per cent in July, driven by higher sales of food products, petroleum and coal products, and transportation equipment. At the same time, inventories declined by 0.7 per cent, largely because of decreased inventories of chemical products.
- In July, Canada’s merchandise imports decreased by 5.4 per cent, while exports increased by 0.7 per cent. As a result, the country’s merchandise trade deficit narrowed from $4.9 billion in June to $987 million in July. The strike at British Columbia marine port terminals had a notable impact on international trade, leading to decreased imports and exports to and from the marine ports. However, the decline in exports was offset by increases in products less affected by the strike.
- Canadian consumer confidence saw a decline in September. 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.
- In August, the economy added a modest 40,000 jobs, primarily because of an increase in self-employment. The unemployment rate remained unchanged at 5.5 per cent, while robust population growth pushed the employment rate down to 61.9 per cent.
Insights
- Canadian households continue to grapple with the high costs of living. In August, inflation rose 4.0 per cent on a year-over-year basis, with gasoline playing a significant role in this overall price increase. Shelter prices accelerated, and the burden of expensive groceries continues to weigh on consumers. Furthermore, various factors, including unusual weather patterns and the collapse of Ukraine’s grain agreement, could exert negative pressure on global food production and costs. Canadians may have to endure elevated inflation and higher interest rates for an extended period. Moreover, with the cooling of labour market activities and re-acceleration of core inflation, the Bank of Canada faces increasingly challenging monetary policy decisions. Should core inflation persist at elevated levels, the Bank may be forced to raise interest rates again.
- The Canadian economic picture looks bleak—but it’s not all doom and gloom. Economic momentum has waned in recent months due to the impact of higher interest rates, which have put the brakes on household spending growth. Meanwhile, labour market tightness has been on a declining trend. Our Canadian Hiring Index shows a recent increase in online job postings for August, though they have generally been on a downward trajectory over the past year. Nevertheless, the current volume of online job postings closely aligns with the averages observed in 2018 and 2019, suggesting that the labour market is softening while gradually returning to pre-pandemic norms. After a robust recovery from the pandemic’s onset, marked by substantial job growth and significantly high inflation, the economy is now entering a cooling phase – a development that need not necessarily be viewed as negative.
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.
The nowcast results will be published monthly.
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.
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.