Headwinds revisited: Canada’s Q3 GDP slows markedly, turns negative in September

It appears that the much-discussed economic headwinds to the Canadian economy are now being felt.  Q3 GDP data was released today and significantly disappointed to the downside.  Economists had been expecting nearly double the meager 1% reading.  At least those economists who don’t frequent this lowly blog.

Even more ‘surprising’ was an outright decline in September GDP reading, which retrenched 0.1%.

From RBC economics:

“While a deceleration was anticipated, the mere 1.0% pace for real output was an eye-opener on just how abruptly the Canadian economy has downshifted.”

Go figure.  Funny how a linear approach to economics tends to miss the glaringly obvious.  Time to put the textbooks down and perhaps adopt a new approach.  Call it ‘common sense economics’.

BMO added an insightful quip:

“Despite a constant refrain about how well the Canadian economy is faring, growth lagged behind the U.S. by a full 1.5 percentage points last quarter and topped only Italy in the G7 growth tables.”


And while we may see some noise around the trend, it should be pretty obvious exactly what that trend is. 

The Laggards:

You’ll note that the three main drags (highlighted in red) are residential investment, exports, and real disposable income.

The decline in residential investment is no shock given the rapidly falling housing starts data as builders flee the market like rats from a sinking ship.  With housing sales near decade lows in most major centres, you can’t blame them there.  You’ll note the huge bounce this gave to GDP in Q4 2009 and Q1 2010.  This was the Canadian economic miracle!  Now that the novelty of extremely cheap credit is wearing thin and demand is sparse, we may finally be hitting the demand gap.  Sales data over the next few months and into the Spring will give crucial insight into this.  Regardless, I don’t see this trend turning around soon.

We just discussed exports yesterday, so I’ll leave that one for now.

The Concerns:

Three potential future issues I see (highlighted in yellow) are the impact of government spending, consumer consumption, and a still low savings rate.

Despite stimulus spending, the impact of government spending is muted as it is being offset by cuts at other levels.  With Flaherty warning of tough budgets to come and with the public seemingly starting to embrace austerity and fiscal prudence (right, Rob Ford?), one can’t help but think that this will provide yet another drag on future GDP growth.

Consumer consumption continues to show resilience, though a slowing is all but assured.  How could it not when household balance sheets look like this:

Add on to that the reality of flat house prices (best case scenario) or falling home prices (much more likely) and you have the recipe for consumer spending to be choked off.

Remember that every 5% fall in house prices strips $10 billion or one full percentage point off consumer spending, which makes up over 65% of GDP.  Simple math tells us then that every 5% fall in home prices strips at least 0.65% off GDP growth, and that’s not counting the spin-off effect of lower residential investment demand.

Finally, while the savings rate has picked up from its all-time lows, it is still well below historical averages.  Combining high debt loads with low savings in an era of historically low interest rates is a recipe for household financial shock if interest rates rise marginally or if unemployment begins rising again.

There will be a mean reversion in the savings rate, which should come directly at the expense of consumer spending as real disposable incomes are still moribund.  Deleveraging and increased savings are a perfect one-two punch for deflationary pressures on credit-reliant assets like real estate.

The Reality:

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4 Responses to Headwinds revisited: Canada’s Q3 GDP slows markedly, turns negative in September

  1. John in Ottawa says:

    Great post and timely too. Thanks Ben!

  2. Roger Gladstone says:

    Great articles. I like to understand what’s really going on as opposed to the whitewashing and spin doctoring….

    For a US perspective on the financial collapse, check out this link:



  3. Pingback: Headwinds Revisited: Canada’s Q3 GDP Slows Markedly, Turns Negative in September

  4. mac says:

    Is it not possible that the US is just now turning the corner out of the recession, albeit in a prolonged U-turn? Companies have begun hiring slowly and even though the US consumer is not shopping like before and American households are saving more, some think the US may be back to 2%-4% growth by 2012. Maybe we are just 12-18 months behind them?


    Here’s an alternative scenario:

    1. The CDN government manages to stall a housing crisis through continued low interest rates (along with lax limits on foreign ownership – my thing, not yours)

    2. Limits to housing affordability flatten out the HPI

    3. The US economy picks up slowly. U-Shape.

    4. We follow shortly thereafter with modest increases to GDP & jobs

    Would that not qualify as miraculous good government?
    (As well as dodging the house-price-crash bullet?)

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