Why Canada’s GDP will drag in Q3

When Canada’s third-quarter GDP growth is released Friday, less sizzle is expected.

TD Bank forecasts a reading of 1.7% quarter-on-quarter annualized, which is “a marked deceleration from recent quarters,” says the bank in a weekly economics report. Q2 growth, for instance, was 4.5%.

Consumers tire, exports slide

Volumes in retail sales dropped for the third-straight month in September.

“The consumer has notably also lost some zip,” says BMO chief economist Douglas Porter, in a weekly economics report.

“Real retail sales have slowed from a blistering 7.3% [year-over-year] pace in June to ‘just’ 4.5% now,” he says.

Rising rates aren’t the reason.

That consumers could be reacting to rising rates is “preposterous,” he says, because reaction couldn’t possibly be so strong and sudden.

Instead, he offers these reasons for consumer restraint: slower home-related goods amid a milder housing market, an unwinding of the boost from the Canada Child Benefit, so-so summer weather and a small ding from rising gas prices.

Read: As spending season begins, Canadians have a debt problem

Most important in the Q3 GDP data will be “signals regarding momentum heading into the end of the year,” says TD.

That’s because the Bank of Canada’s monetary policy is data-dependent. “A soft out-turn in the data may delay any [central] bank action,” says Brian DePratto, TD senior economist, in the report.

An “unnerving development” is the four-month slide in export volumes, says Porter, which is almost unchanged from three years ago.

“This extended period of doldrums for exports comes at a time when the Canadian dollar is still relatively competitive, the U.S. economy is clicking along steadily and even global growth is producing an upside surprise this year,” he says.

Central bank sits tight

Porter expects a reading of 1.6% for Q3 GDP.

“With both the consumer and exports mired in multi-month losing streaks, this will only reinforce the Bank of Canada’s new-found caution on further rate hikes,” he says.

CIBC economists Andrew Grantham and Royce Mendes agree. “Expect the Bank of Canada to be content even if its wait-and-see approach causes the currency to retreat a bit further,” they wrote in a weekly economics report.

Read the full reports from TD, BMO and CIBC.

Also read:

Interest rates likely on hold until April: CIBC

What nixing NAFTA would mean for markets