Canada’s economy is still chugging along, and doing better than many experts thought. Statistics Canada (Stat Can) data shows Gross Domestic Product (GDP) advanced in Q3 2024, mainly driven by household borrowing and government spending. A continued drop in per-capita GDP was almost entirely overshadowed by big upward revisions to prior data. One of the country’s largest banks notes this completely changes the economic outlook, trimming expectations the Bank of Canada (BoC) will pursue aggressive rate cuts.
Canadian Real GDP Climbs In Q3, Another Sharp Per-Capita Drop
Canadian output advanced but made a smaller move than the upwardly revised quarters it followed. Stat Can data shows real GDP grew 0.3% in Q3, which was actually 0.256 points rounded up but who’s counting? It’s notably smaller than the 0.5 point growth in both Q1 and Q2, after big upward revisions to the data.
It wasn’t far off from the Bank of Canada (BoC) target of 1.5%, though economists at BMO emphasize that’s post downward revisions from the BoC. The central bank had forecast 2.8% growth until October, nearly cutting their forecast in half a month after Q3 officially ended but had yet to be reported.
Despite aggregate growth, Stat Can emphasized a lack of per-capita progress. They warn per-capita, real GDP fell 0.4% in Q3, marking the 6th consecutive negative quarter.
Canada’s Economy Is Almost Entirely Household Debt & Government
The progress is overshadowed by the details of where the growth is present and where it’s missing. “… contributions to GDP growth from higher household and government spending were moderated by slower non-farm inventory accumulation, lower business capital investment and lower exports,” noted the agency.
When they note that households and government drove the growth, they mean it. Only 4 of the 7 major segments contributed to the positive move, and the other two were so small they would round down to zero contribution. Higher household spending (+0.9%) advanced at 3x the average, driven by spending on new vehicles and financial services. Meanwhile, government consumption (+1.1%) showed nearly 4x average growth, driven by growth at all levels (municipal, provincial, and federal). It was the third consecutive increase, and for context, it contributed the equivalent of 94.5% of total GDP growth.
As previously noted, government spending isn’t an issue when viewed in isolation. The takeaway shouldn’t be that the government spends too much, but it should help cut through the narrative presented. Most governments run deficits in Canada, significant ones despite the budgets they present (they’re often revised shortly after). Since debt is future consumption pulled forward, the current economic boost comes at the cost of future growth (with interest).
Economists generally believe that every point the debt to GDP ratio rises above 70% leads to GDP shedding 0.5 points of growth long-term. Since the growth compounds, the economic drag is much bigger than most realize. That’s why careful consideration and a proper assessment of the economy is needed. Borrowing is often needed to mitigate a sharp near-term pain, but the pain isn’t eliminated. The sharp immediate pain is turned into a dull, long-lasting one felt over the long term. The spending may or may not be valid, that’s between constituents and their elected officials—but it’s not a free ride.
Currently, the narrative is that Canada’s economy is strong and doing fantastic. Strong economies typically aren’t reliant on household borrowing and government stimulus, requiring aggressive rate cuts. Canada’s strong economy is based mainly on a tepid economy receiving a level of government stimulus only observed during the deepest recessions. However, if this were a public company, management would be accused of “window dressing”—prioritizing short-term appearances at the expense of long-term stability and prosperity.
That stimulus at the expense of future growth looks even more questionable with the massive upward revisions to GDP.
Canada’s Upward GDP Revisions Mean Smaller Rate Cuts Needed
Canadian output problems have been eliminated at the speed of a few keystrokes. “While the recent results are somewhat disappointing, the other piece of today’s data puzzle was a set of very large upward revisions to past growth,” wrote BMO Chief Economist Douglas Porter.
Porter previously noted that annual GDP revisions would work their way down to quarterly data, and that’s what happened. Overall, real GDP has been increased by 1.5% since 2020—adding more than the annualized growth currently on target. “To put that in perspective, that’s larger than the BoC’s latest estimate of the output gap,” said Porter.
The output gap is the difference between a country’s real and potential output. It’s a particularly important measure for the BoC’s rate decision. In this case, the upward revisions shift the economy from needing stimulus to being in excess demand. It means a lot of things, and Porter touched on two of the most important—GDP and interest rates.
Excess demand and stronger-than-expected growth will drive GDP expectations higher. At the aggregate level, at least. “Because of the firmer starting point, we are lifting our estimate of full-year growth for 2024 to 1.3% (from 1.1% previously), even with the soggy Q3 result,” explains the bank.
Porter also expects the BoC to change its tune, slowing down on rate cuts. Since excess demand precedes inflation, the revised output gap is now a warning of inflation re-acceleration. Markets previously expected another 0.5 point cut in December, but have since cut those expectations in half. An upward GDP revision, a GST holiday & direct cash stimulus, and the return of inflation are factors that will work against future rate decisions as well.
“For the Bank of Canada, we don’t see enough here to push the Bank to cut aggressively again in December—especially in light of the hefty upward revisions, even this year. We’re still in the 25 bp camp,” said Porter.
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