(Bloomberg) -- The Canadian economy eked out a small gain last month after a weaker-than-forecast third quarter, keeping the Bank of Canada on track to keep cutting rates.
Preliminary data suggest gross domestic product rose 0.1% in October, Statistics Canada said Friday. That followed a similar 0.1% increase a month earlier, which missed economist expectations and rounded off the third quarter with an annualized growth of 1%.
The Bank of Canada expected a 1.5% expansion between July and September, while economists in a Bloomberg survey predicted a 1.1% gain. Overall, it’s a deceleration from the upwardly revised 2.2% and 2% growth in the second and first quarters, respectively.
After the release, traders in overnight swaps increased their bets for another-half point cut from the central bank, putting the odds at over a third, from a one in four chance previously. The loonie fell to a session low of C$1.4035, while Canadian government bonds rallied, with the two-year yield falling around 5.5 basis points to 3.12% and the 10-year yield sinking 6.7 basis points to 3.15%.
Household consumption rose by 3.5% in the third quarter, the fastest pace since early 2023, and following the start of the central bank’s rate cuts in June. Income growth slowed but remains strong, and the household savings rate rose to 7.1%, the highest in three years.
Business investment was the biggest drag on growth last quarter, and non-residential business investment fell 11.3%, partially reversing a large gain in the previous quarter. Final domestic demand rose 2.4%.
The weaker-than-expected growth means the central bank will continue trimming borrowing costs, but there’s still little evidence that the country’s economy is in any serious trouble. Upward revisions show Canada’s economy is larger than previously believed, on a combination of stronger household consumption in 2021 and better business investment prospects in 2022 and 2023.
The central bank’s next rate decision is scheduled for Dec. 11. Bank of Canada officials stepped up the pace of interest-rate cuts in October to boost economic growth as price pressures eased.
Since that meeting, a string of economic data hasn’t made a clear case for another 50 basis-point cut. Inflation reaccelerated to 2% last month, and while the economy and jobs market remain soft, there are signs that rate cuts are starting to boost consumer spending and housing. Some economists see policymakers reverting back to a 25 basis-point reduction next month.
On a per-capita basis, while GDP contracted for the sixth straight quarter, household expenditures edged up after falling in six quarters over the last two years.
Government expenditures also increased, with spending across all levels of government rising.
“There is nothing is this report to change our view that the Bank of Canada will cut its policy rate by 25 basis points in December,” Charles St-Arnaud, chief economist at Alberta Central, said in an email.
“However, the weakness in business investment, especially machinery and equipment, could signal some poor business confidence. Similarly, the lack of growth on the exports side suggests that Canada has a hard time capitalizing on strength in the US.”
Andrew Grantham, economist at Canadian Imperial Bank of Commerce, argued the data is supportive of a 50 basis-point cut at the December meeting.
“Despite the positive historic revisions and better underlying detail within the third-quarter data, today’s GDP figures point to a weaker recent trend in activity than the Bank of Canada was expecting,” he said.
Statistics Canada is set to report November jobs figures next Friday, which will be important to determining the size of the central bank’s next rate cut, Grantham added.
“There is no convincing argument in the data as to why the Bank of Canada shouldn’t keep going at a 50 basis-point pace in December,” Kyle Chapman, FX market analyst at Ballinger Group, said in a note to investors.
“As uncertain as ‘neutral’ is, the sooner rates are there, the better,” he said.
Both the central bank and economists see the economy strengthening over the coming quarters, although upcoming sales tax holiday and cash handouts as well as possible US tariffs could change the growth trajectory.
In October, growth in the real estate, transportation and retail sectors were partially offset by declines in construction as well as mining and oil and gas extraction. In September, gains were led by wholesale and retail trade.
--With assistance from Jay Zhao-Murray and Carter Johnson.
(Adds reaction from economists starting in paragraph 12.)
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