File photo of a construction worker on a site in downtown Toronto.Mark Blinch/Reuters
Don't judge the economy by just one quarter's performance.
GDP surged at an annual pace of 2.7 per cent this summer, or faster than it has in more than two years. But economists are warning not to read too much into the unexpectedly strong rebound in third-quarter GDP, which was led by solid gains in consumer spending, construction and business investment.
The increase in gross domestic product comes on the heels of 1.6-per-cent growth in the second quarter (revised down from 1.7 per cent) and 2.3 per cent in the first quarter. The performance beat the consensus forecast of 2.5 per cent and was a full percentage point better than the Bank of Canada had expected.
But several factors worry analysts as they sift through the details of Friday's GDP report from Statistics Canada. Much of the increase was due to a buildup in inventories by retailers and farmers, rather than sales. Wheat and canola farmers, for example, enjoyed a bumper crop but prices are down because demand isn't keeping up with supply.
The recovery in investment could prove to be more of a blip than a trend – the result of pent-up demand after the Quebec construction strike and Alberta floods in the second quarter. Those events temporarily held back building in Quebec and work on oil and gas projects in Alberta.
Also worrying is that Canada's trade performance, which represents roughly a third of the economy, continues to be a drag on GDP due to weak exports.
"There is still a long way to go before growth will be strong enough to warrant rate hikes, and the road ahead looks bumpy," said Toronto-Dominion Bank economist Leslie Preston. "Canada is inextricably linked to the fortunes south of the border, where growth [in the fourth quarter] is looking very soft."
Many of the sources of economic strength in Canada are waning, Ms. Preston pointed out. Consumers are carrying heavy debt burdens, residential construction is slowing, manufacturers are facing intense competition in the key U.S. market and prices for oil and other key resources have fallen since the end of September.
A better gauge of the economy's underlying strength is to look at several quarters. Over the past four quarters, the economy is growing at slightly less than 2 per cent.
"We are not assuming that this upward trajectory will continue going forward," Paul Ferley, assistant chief economist at Royal Bank of Canada, said of the third quarter.
Bank of Montreal chief economist Doug Porter characterized the quarter as "a touch less friendly" than the headline 2.7-per-cent growth suggests.
Economists warn that there is still plenty of slack in the economy – unemployed workers, unused factory capacity and the like. That's reflected in extremely low inflation. In October, for example, the consumer price index rose at a meagre 0.7-per-cent annual rate – well below the Bank of Canada's 2-per-cent target and completely outside the 1- to 3-per-cent range of what it considers reasonable. That suggests that the economy isn't growing fast enough to soak up excess capacity.
The Bank of Canada's next scheduled rate setting announcement comes Wednesday. But economists are not expecting the central bank to change its key overnight lending rate, fixed at 1 per cent since September 2010, or adjust its neutral stance on rate hikes. Most don't expect the bank to start raising rates until late next year or 2015.
The GDP report also showed that Canadians are starting to get their personal finances in order after a long debt binge. Household credit expanded by the slowest annual pace since the mid-1990s at 3.8 per cent, the savings rate edged up to 5.4 per cent and the debt service ratio fell to 7.2 per cent. Disposable income also grew by 1.2 per cent.