TORONTO – Unbelievable but true: Canada saw stronger-than-expected economic growth in the third quarter, though economists warn the numbers don’t paint such a positive picture. But let’s go in order. 

Statistics Canada said on Tuesday that the economy grew at an annualized rate of 2.9% between July and September, compared with 3.2% growth in the second quarter. While the overall growth rate is more likely than forecasts suggest, the decline in consumer spending suggests that higher interest rates are starting to affect the economy more broadly. In fact, household spending decreased for the first time since the second quarter of 2021, falling by 0.3%.

As is well known, the Bank of Canada has been raising interest rates since March and has done so six consecutive times, rapidly bringing the official rate to 3.75%. The rate hikes were first felt in the housing market, which cooled markedly as mortgage costs rose. Over time, economists predict that these rate hikes will affect spending in more parts of the economy, as indeed is already happening in household spending.

However, general economic growth had a positive effect on real gross domestic product which increased by 0.7% in the third quarter, beating the preliminary growth estimate by Statistics Canada, which was 0.4%. Monthly data on real GDP showed that the economy grew by 0.1% in September, with the increase in real GDP driven by the goods manufacturing industries.

The preliminary estimate by Statistics Canada for October therefore suggests that the economy has remained stable: therefore the possibility of a recession, at least for the moment, is far away.

The quarterly GDP report also provides insight into how wages for Canadians have changed. On a quarterly basis, nominal wages for employees increased by 1.2%, which marks the slowest growth in wages since the second quarter of 2020. At the same time, household savings rates increased by 5.1 percent in the second quarter to 5.7 percent in the third. By way of comparison, the savings rate in the third quarter of 2019 was 2.5%.

Overall, economic growth in the third quarter was driven by an increase in exports, driven by increased exports of crude oil and bitumen, albeit at lower prices.

As for the forecast, the economy is likely to slow more markedly in the fourth quarter in response to higher interest rates.

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