Q3 GDP Worse Than Expected - Should We Brace for Impact?

December 1, 2023 - Statistics Canada released the Q3 GDP results yesterday, showing that the economy shrank by 0.3% in the quarter compared to Q2. On an annualized basis, this is a 1.1% decline - much worse than the 0.8% growth forecast by the Bank of Canada (BoC). In fact, thanks to some sleight of hand, GDP shrinkage is not as bad as it would have been - StatsCan has been using 2012 dollars to eliminate the effects of inflation, but, for Q3, changed that to 2017 dollars. This resulted in the Q2 annualized decline of 0.2% reported earlier being recast as a 1.2% increase. This is a normal change, but the effect of it is that two consecutive quarterly declines (the dictionary definition of a technical recession) becomes a decline in only the current quarter. 

Non-residential structures, machinery and equipment, the economic sector we participate in, declined at an annualized 10.1%, after growing for the first two quarters of the year. Engineering structure spending fell by an annualized 9.6% in Q3. Business spending on machinery and equipment was down by 14.4% in the quarter.

Overall, only imports, government expenditures, and residential structures were up.

So, should we brace for impact? This is difficult to predict at this point, but we believe that Q4 GDP will be flat or show a small decline, and Q1 2024 will also be soft. While this is tough news for businesses, it should help to further slow inflation and give the BoC some room for decreases in the bank rate in Q2 2024.