Canada's August GDP falls 0.3% month-over-month

Key Concepts

GDP (Gross Domestic Product): A monetary measure of the market value of all final goods and services produced in a specific time period.
Month-over-month: A comparison of a statistic from one month to the previous month.
Year-over-year: A comparison of a statistic from a given month to the same month in the previous year.
Tariffs: Taxes imposed on imported goods and services.
Goods producing industries: Sectors of the economy involved in the production of physical goods (e.g., manufacturing, mining).
Services industries: Sectors of the economy that provide intangible services (e.g., retail, hospitality, finance).
Technical recession: A period of economic decline characterized by two consecutive quarters of negative GDP growth.
Bank of Canada: Canada's central bank, responsible for monetary policy.
Interest rates: The cost of borrowing money.
USMCA (United States-Mexico-Canada Agreement): A free trade agreement that replaced NAFTA.
Exemptions: Specific exclusions from a general rule or policy, such as tariff exemptions.
Strikes: Work stoppages by employees to protest working conditions or seek better terms.
Oil and gas sector: Industries involved in the exploration, extraction, refining, and distribution of oil and natural gas.
Mining sector: Industries involved in the extraction of valuable minerals from the earth.

Latest GDP Numbers and Economic Contraction

The latest Gross Domestic Product (GDP) numbers have been released, indicating a month-over-month contraction of 0.3%. Year-over-year, GDP is up 7%. Dominic La Point, Director of Macro Strategy at Manulife Investment Management, expressed surprise at the 0.3% contraction, noting that such a decline hasn't been seen in a considerable time. While a weak print of 0% was expected, the actual 0.3% decline suggests that tariffs are impacting goods-producing industries more significantly than anticipated. The expected stabilization in the economy has not materialized in August and its occurrence in September and the fourth quarter remains uncertain.

Specific Economic Drags and Sectoral Concerns

La Point identified the goods producing industry as the primary factor contributing to the negative GDP number. The key concern moving forward is whether a slowdown will begin to manifest in services industries, such as retail, hotels, and finance. A slowdown in these sectors would be more concerning for Canada's overall economy, as they have been a reason for the absence of broader weakness thus far.

Indicators of a Technical Recession

A slowdown in services industries, potentially moving closer to zero growth, would likely correspond with an increase in the unemployment rate and job losses in these sectors. This scenario would lead to considerations of a technical recession. While this is not the base case currently, and the GDP for the quarter is still projected to increase, the growth is weaker than anticipated and deviates from the Bank of Canada's projections made just two days prior.

Bank of Canada's Monetary Policy Outlook

The recent GDP print, occurring two days after the Bank of Canada stated they were on pause with interest rates, raises questions about their future actions. The Bank had indicated that rates had come down sufficiently and that they couldn't offset tariff-related weakness by further cuts. However, they remain prepared to move downward if there's a significant change in the economic outlook. The 0.3% contraction is a notable deviation from the base case. While it's too early to definitively say if this downward momentum will be sustained, it challenges the notion that the economy has bottomed out and is undergoing a slow recovery. La Point does not anticipate rate cuts in December or January, but suggests that a couple more such prints could lead the Bank to consider cuts around the middle of next year.

Long-Term Concerns: USMCA Renewal

Looking further ahead, the USMCA renewal process is identified as the biggest concern. Currently, 85% of Canadian exports are tariff-exempt due to the USMCA, which is a significant factor supporting the economy and keeping the unemployment rate capped around 7%. The uncertainty surrounding the outcome of these negotiations, particularly the possibility of a free trade agreement not being renewed and the imposition of baseline tariffs of 10-15% on all exports, could exert significant downward pressure on industries and further slow down the recovery. This is considered a very likely risk that households, businesses, and markets need to consider.

Impact of Strikes and Sectoral Performance

Flight Attendant Strike: While a strike can cause a temporary drag, its resolution can lead to a rebound in that industry. La Point would be surprised if the entire 0.3% weakness stemmed solely from the airline strike.
Recurring Strikes: Canada is currently experiencing numerous recurring strikes, which collectively put downward pressure on overall growth. An example cited is a potential month-long strike on the railway system in Montreal.
Oil and Gas/Mining: The oil and gas sector has performed relatively well this year, with companies demonstrating capital discipline. However, the GDP numbers bundle this with the mining sector, which includes commodities like copper that are subject to tariffs. This tariff impact on inputs for steel or aluminum might be causing struggles in that specific part of the sector, making it a mixed bag. Despite this, oil and gas has been a supportive factor for growth this year.

Conclusion and Key Takeaways

The latest GDP figures reveal a concerning 0.3% month-over-month contraction, primarily driven by weakness in goods-producing industries. While services have held up, a potential slowdown in this sector would be a significant worry. The Bank of Canada's pause on interest rates may be re-evaluated if this downward trend persists. The most significant long-term risk identified is the uncertainty surrounding the USMCA renewal, which could introduce substantial tariffs on Canadian exports. The ongoing wave of strikes also contributes to downward pressure on economic growth.