OTTAWA, Sept 10 (Askume) – Canada’s third-quarter gross domestic product is likely to be well below the Bank of Canada’s forecast and could be as much as half of what was forecast, economists said this week, with economic growth slowing and unemployment still rising.
In July, the Bank of Canada estimated that Canada’s third quarter GDP would grow by 2.8%, driven by falling borrowing costs, rising exports and increased domestic spending.
Economists’ lower forecasts for economic growth reflect limited consumer spending in recent weeks and increased difficulty for immigrants finding jobs in Canada.
Six economists interviewed by Askume said a drop in growth expectations, particularly if it was significant, could prompt the central bank to cut interest rates more than before in the future to prevent the economy from slipping into recession.
“I think it’s unlikely that the Bank of Canada’s third quarter forecast will actually come true,” said Andrew DeCapua, senior economist at the Canadian Chamber of Commerce.
DeCapua said Canada’s gross domestic product will grow about 1% to 1.5% annually in the third quarter ending Sept. 30, adding that the central bank is more likely to cut rates further.
Disappointing economic indicators from Statistics Canada on GDP and the labour force prompted economists to update their models.
Last month, Statistics Canada said economic growth remained stable in June and is expected to remain unchanged in July. Last week’s Labour Force Survey showed the unemployment rate rose to 6.6% in August, the highest level in seven years excluding the pandemic. Employees also reduced their working hours in August, impacting income levels.
“For months we have seen a stagnant labour market with no growth,” said Pedro Antunes, chief economist at The Conference Board Canada, an independent think tank.
“This points to very weak growth in the third quarter,” he said, adding that the bank’s forecast could be half or even less.
Canadian household spending, which accounts for 57% of GDP, slowed 0.2% in the second quarter as rising interest rates curbed consumer purchases. Higher mortgage costs and rising rents have reduced disposable income.
Faster population growth than economic expansion has also fueled unemployment, and the sluggish economy cannot cope with the influx of immigrants. This dynamic has put pressure on growth, leading to five consecutive quarters of declining GDP per capita.
downside risk
Bank of Canada Governor Tiff Macklem acknowledged last week that while the bank said economic growth has been strong, there are some downside risks to expected growth.
After maintaining its main policy rate at 5% for a year, the highest level in more than two decades, the Bank of Canada has cut its key policy interest rate by 25 basis points three times since June, reducing it by 75 basis points to 4.25%.
Macquarie’s head of economics David Doyle said the jobs data raised risks to the Bank of Canada’s growth outlook and the likelihood of a 50 basis point rate cut in October.
Randall Bartlett, senior director of Canadian economics at Desjardins, said the central bank could also be wrong about Trans Mountain Expansion (TMX) pipeline production and development and vehicle exports.
The bank said in its July monetary policy report that export growth is expected to pick up in the second half of the year led by TMX and automobile exports, boosting GDP.
“We think the Bank of Canada is overly optimistic, particularly in these two areas,” he said.
Bartlett said Desjardins expects third-quarter gross domestic product to grow 1%, compared with the central bank’s forecast of 2.8%.
