Yet Another Challenging Quarter Lies Ahead for the Canadian Economy
GrowthNow: A Real-Time Forecast of Canada’s Economic Growth
Key Trends
- Our nowcast flash estimate of real GDP growth for the third quarter of 2023 came in at just 0.04 per cent (quarter-on-quarter) — implying that another quarter of lacklustre growth is on tap for Canada’s economy.
- (Most of) the major drivers of the economy point to a slowdown in economic activity.
- GDP by industry dipped by 0.2 per cent in June. Output in both services- and goods-producing industries contracted. Construction activity, both residential and non-residential, decreased. Meanwhile, across the services industries, wholesale trade produced the largest drag on GDP by industry in June. According to Statistics Canada’s preliminary estimates, GDP by industry is expected to remain unchanged in July.
- Retail sales rose by 0.1 per cent in June, driven by an increase in sales at motor vehicle and parts dealers. However, sales declined in six out of nine subsectors. In volume terms, retail sales were down 0.2 per cent.
- Manufacturing sales fell by 1.7 per cent in June, to cap off an underwhelming second quarter. The drop in petroleum- and coal-product sales, as well as in chemical and machinery sales, contributed most to the decline.
- Despite improvements in June, overall weaker inventory accumulations in the second quarter put downward pressure on GDP growth. In fact, the Canadian economy recorded the smallest buildup in the stock of inventories since the fourth quarter of 2021.
- National employment levels held steady in July, after rising by 0.3 per cent in June. Across the goods-producing industries, declines in the construction industry outweighed gains in manufacturing and agriculture. Among the services-producing industries, health care and educational services recorded the strongest job growth. Our Canadian Hiring Index showed that online job postings across all occupations declined in July, providing further evidence that an economic slowdown is developing.
Insights
- The Canadian economy has lost momentum. Following an adjusted annualized growth rate of 2.6 per cent in the first quarter of 2023, real GDP contracted by 0.2 per cent on an annualized basis in the second quarter. Canadians have shown resilience in the face of elevated prices and rising interest rates, but it appears that higher interest rates are beginning to make an impact — growth in household spending decelerated to 0.1 per cent in the second quarter of 2023. Furthermore, the Canadian economy is approaching the 18-month mark since the Bank of Canada began implementing tightening monetary policies, which means that the full effects of recent rate hikes have yet to be realized and will continue to influence the economy in the coming months. Our nowcast for GDP growth in the third quarter (0.16 per cent, annualized) suggests that the Canadian economy will continue to stall.
- The cost of living is becoming a growing concern. In July, the national inflation rate jumped to 3.3 per cent year-over-year. Mortgage interest expenses have gone up, and rental price growth remains elevated. Additionally, Canadians are still grappling with staggeringly high prices at grocery stores. Higher living expenses have undeniably had an impact on consumer confidence, which has been on a downward trajectory for the past two years. Consumer confidence has reached its lowest point since the start of the pandemic, with only 10.0 per cent of survey respondents indicating an improvement in their current financial situation compared to six months ago. Given the July inflation increase and the easing of economic growth, the Bank of Canada’s monetary policy decisions have become increasingly difficult — especially since Canadian households are the most indebted among G7 nations.
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, 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 Three-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.