As the Canadian economy shrank on a per-person basis in the third quarter, economists say consumer spending showed signs of strength due to lower interest rates and improved purchasing power.
Statistics Canada released gross domestic product (GDP) figures Friday, noting that the economy grew at an annualized rate of one per cent in the third quarter, lower than 2.2 per cent in the previous quarter. The figure came in lower than the Bank of Canada’s October forecast of 1.5 per cent, but in line with expectations among economists. Meanwhile, real GDP per capita fell by 0.4 per cent in the quarter, marking the six consecutive quarter of declines.
“The lifeblood of the economy is the Canadian consumer, and they have been carrying the weight over 2024,” James Orlando, director and senior economist at TD Economic, wrote in a report Friday.
“As interest rates continue to fall alongside a wave of government stimulus over the coming months, we are looking for consumer spending to keep lifting GDP through at least the first half of 2025.”
Household spending rose 0.9 per cent in the third quarter, driven by expenditures on new trucks, vans and sport utility vehicles, according to Statistics Canada.
Orlando noted that an uptick in consumer spending per capita was positive after coming in negative for much of the past two years.
Nathan Janzen, assistant chief economist at Royal Bank of Canada, said in a report Friday that consumer spending rose by 3.5 per cent during the quarter.
“Some interest rate sensitive sectors (residential investment, consumer spending) showed signs of life in Q3 following the start of BoC interest rate cuts in June. But per-capita GDP was still down for a sixth consecutive quarter, and with soft growth momentum extending into monthly estimates into early Q4,” he said.
Janzen noted that the latest GDP data should “help reinforce” that interest rates are higher than needed to maintain inflation rates around two per cent.
Purchasing power
Tu Nguyen, an economist with assurance, tax & consultancy firm RSM Canada, said in a statement Friday that GDP figures from the third quarter showed the “first signs of household spending” moving higher “thanks to rate cuts.”
“The 1.7 per cent growth in employee compensation also boosted households’ purchasing power, setting up what will be a strong holiday shopping season in the fourth quarter, further supported by the federal GST/HST tax break,” Nguyen said.
Alberta Central Chief Economist Charles St-Arnaud echoed that sentiment in a report Friday, saying the increase in spending per capita can be attributed to improvements in household purchasing power.
“As such, disposable income rose by 2.3 per cent q-o-q (quarter over quarter) in Q3, and we estimate that real disposable income per capita increased by one per cent q-o-q, which is the biggest increase since the pandemic,” he said.
“Nevertheless, real disposable income per person is 4.5 per cent below its pre-pandemic trend, explaining why households feel poorer.”
With files from The Canadian Press