(Bloomberg) -- The Canadian economy is still in need of more fuel from interest-rate cuts, with third-quarter output growing slower than the Bank of Canada’s latest estimate.
Preliminary data suggest gross domestic product rose 0.3% in September, following August’s flat growth, which was in line with expectations, and July’s downwardly revised 0.1% gain, Statistics Canada reported Thursday in Ottawa.
These industry-based GDP numbers point to the economy expanding at a 1% annualized pace in the third quarter. That’s below the Bank of Canada’s 1.5% forecast as well as economist estimates of 1.2% in a Bloomberg survey.
The quarterly gain of 1% is also a deceleration from 2.1% growth in the previous three-month period to June.
The data showed the central bank’s first few rate cuts have yet to boost the sputtering economy. Policymakers already stepped up the pace of their easing cycle after inflation fell below their 2% target. Softer-than-expected growth will likely keep them cutting borrowing costs to a level that doesn’t restrict economic growth and consumption.
The report was released at the same time as US data showed the Federal Reserve’s preferred measure of underlying inflation posted its biggest monthly gain since April, bolstering the case for a slower pace of interest-rate cuts in that country.
Divergence between Canadian and US interest rates can put downward pressure on the loonie, creating higher import costs and risking reigniting inflation. Bank of Canada Governor Tiff Macklem reiterated at a Canadian Senate committee on Wednesday that he believes his bank is not yet close to the limits of divergence. The Bank of Canada’s key policy rate is 3.75%, compared with the federal funds target range of 4.75% to 5%.
The loonie traded at C$1.391 per US dollar after the releases on Thursday, just shy of C$1.398, which was its lowest level since the pandemic. The government of Canada two-year bond yield dipped slightly before rising to 3.104% as of 10:15 a.m. in Ottawa.
“The Canadian dollar is pushing lower, but is again running into strong support below the C$1.40 threshold,” Karl Schamotta, chief market strategist at Corpay, said in a report to investors. “We think risks are tilted to the downside heading into Tuesday’s US election, and suspect that the exchange rate could weaken sharply if Donald Trump emerges victorious.”
The Halloween release showed Canada’s economy isn’t exactly “rising from the dead,” despite a few hints that growth picked up in September, Andrew DiCapua of the Canadian Chamber of Commerce said in an email.
“There’s no doubt Canadians need more treats to get things moving. The economy faces serious headwinds, and with growing uncertainty in the outlook, the bank’s third-quarter forecast may be a little too optimistic.”
The data support the Canadian Imperial Bank of Commerce’s call for another 50 basis point rate cut in December, economist Andrew Grantham said in a report to investors.
“Canadian GDP was both trick and treat, with weakness at the start of the third quarter followed by a solid rebound during its final month,” he said.
In September, the 0.3% monthly GDP growth was led by finance and insurance, construction and retail trade — industries that also expanded a month earlier.
In August, service industries rose 0.1%, driven primarily by increases in the finance and insurance as well as the public administration sectors. Goods-producing industries, however, dropped 0.4% to their lowest level since December 2021. The decline was led by the manufacturing and utilities sectors.
Work stoppages at two Canadian rail carriers led to decreases in the transportation and warehousing sector, which fell 0.3%, the second straight monthly contraction. A bridge collapse in Fort Frances, Ontario, also disrupted rail movement of goods into the port of Thunder Bay in that province.
Wholesale trade contracted 0.6%, which is the third time in four months, while retail trade rose 0.6%, with higher new car sales driving the growth.
--With assistance from Jay Zhao-Murray.
(Updates market reaction in paragraph eight.)
©2024 Bloomberg L.P.