Canada's economy unexpectedly shrinks 1.1% in Q3 but skirts recession

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -The Canadian economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, data showed on Thursday, avoiding a recession but showing growth stumbling ahead of next week's interest-rate decision.

The third-quarter reading came in below the 0.2% gross domestic product (GDP) increase forecast by analysts in a Reuters poll, and below the Bank of Canada's (BoC) 0.8% projected gain.

The economy avoided slipping into a technical recession - defined as two consecutive quarter-on-quarter contractions - because second-quarter GDP data was revised up to a 1.4% gain from an initial report of a 0.2% decline, Statistics Canada said.

"I think the big picture here is the economy is struggling to grow, but it is keeping its head just above recession," said Doug Porter, chief economist at BMO Capital Markets. "I would almost say it's swimming upstream."

After the release of the data, the Canadian dollar was trading 0.2% lower at 1.3620 to the U.S. dollar, or 73.42 U.S. cents, as the greenback notched gains against a basket of major currencies.

The BoC has remained on the sidelines since July after lifting its benchmark interest rate to a 22-year high of 5% to tame inflation. Money markets expect a rate cut as soon as March and a hold at the next announcement on Wednesday.

"The bottom line is that the economy is still sputtering along," said Royce Mendes, head of macro strategy at Desjardins Group. "Our view continues to see the Bank of Canada beginning a rate-cutting cycle in the second quarter of 2024."

Governor Tiff Macklem last week said interest rates might be at their peak because excess demand has vanished and weak growth is expected to persist for many months.

The BoC will start cutting interest rates in the second quarter of next year as inflation and the economy slow, according to a Reuters poll published earlier on Thursday.

"If you look at the data in aggregate for the Bank, what this means is that conditions are tight enough for now," said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

Real GDP most likely edged up 0.2% in October after a 0.1% gain in September, Statscan said.

A decrease in exports and slower inventory accumulation weighed on the economy in the third quarter and were partially offset by increases in government spending and housing investment, Statscan said, noting that new housing construction increased for the first time since early 2022.

The month-over-month GDP gain in September, led by goods-producing industries, exceeded analysts' forecast for it to remain flat.

In an advance estimate for October, Statscan said increases in mining, quarrying, and oil and gas extraction, retail trade, and construction sectors were partially offset by decreases in the wholesale trade sector.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; Additional reporting by Dale Smith in Ottawa, Divya Rajagopal and Fergal Smith in Toronto; Editing by Mark Porter)