Canada’s largest bank believes weak economic output will justify big rate cuts in a few days. A new RBC report notes that gross domestic product (GDP) climbed in Q3 2024, but the slower-than-expected growth was driven entirely by government spending. More concerning to their team was the 6th consecutive per-capita decline, with the first Q4 data points indicating a 7th may be on the way. Consequently, RBC has forecast a supersized rate cut at this month’s central bank rate decision, despite many other institutions cutting their expectations in half.
Canadian Per-Capita GDP Fell 6 Consecutive Quarters
Canadian GDP increased at the aggregate level, but once again failed to keep up with population. Real GDP showed 1.0% annualized growth in Q3 2024, but fell 1.7% on a per-capita basis. Last quarter marked both the largest per-capita decline of the year, and the 6th consecutive one. Per-capita growth has been negative 8 out of the past 9 quarters, implying Canada is deep into a per-capita recession.
Stat Can’s preliminary estimate for the next report also indicates weak aggregate growth. RBC notes the weak start for Q4 is likely to extend into the quarter, though this type of data often sees massive revisions.
Negative per-capita GDP growth and a weak start to Q4 are bad news. That news gets worse when the data is broken down.
Canadian GDP Growth Would Be Non-Existent Without Substantial Government Spending
Extending RBC’s concerns about the economy is the source of growth. The weak GDP growth was dependent entirely on government spending. This is a move typically only observed during recession, when a state needs to create employment absent of private sector investment. That appears to be exactly what’s happening here.
“Another jump in government expenditures accounted for 1.2 percentage points of GDP growth (i.e. GDP would have declined outright without it) — and half of the 2.4% increase in final domestic demand,” explains Nathan Janzen, assistant chief economist at RBC.
Janzen goes on to note that rate cuts helped two sectors heavily influenced by credit. Substantial growth was seen in consumer spending (+3.5%) and residential investment (+3.0%), though not much else. Business investment plunged 11% lower over the same period, which is not great. Cheaper credit is stimulating non-productive spending, but failing to attract productive investment.
RBC Forecasting Supersized Rate Cut Despite Other Banks’ Tapering Expectations
RBC sees the tepid growth driven by government consumption as a red flag that requires more stimulus. They expect the Bank of Canada (BoC) to make another supersized cut in response to GDP.
“Those early estimates have been highly revision prone, but that leaves the monthly data tracking in line with our projection for a 1% Q4 increase – and about half the BoC’s 2.0% forecast,” he warns.
The bank sees this data helping to cement another 50 basis point (bp) cut to the overnight rate at the next BoC meeting in December
RBC had a very different take from BMO, despite using the same data. Last week BMO explained they believe recent GDP revisions mean the BoC’s concerns regarding a deflationary output gap have now been eliminated. When combined with CPI acceleration, they expect the central bank to remain more cautious and take a less aggressive approach.
BMO only expects a 25 bp cut in December, with market expectations more closely reflecting this call. Similar to Oxford Economics, who sees rate cuts being much less aggressive going forward—especially if the U.S. economy continues to defy expectations. They’ve outlined expectations of just a few more rate cuts in the first half of 2025, followed by potential rate hikes in 2026.
English (US) · 