The Bank of Canada's forecast for third quarter growth is looking iffy, these economists warn

Canada’s third-quarter growth might fail to match the Bank of Canada estimates, some economists say, and the economy could fail to build momentum to close out the year.

Statistics Canada on Friday releases gross domestic product (GDP) for September, a flash estimate for October — the first month of the final quarter — and third-quarter GDP, and the economists think poor data, the United States government shutdown and overly optimistic previous flash estimates could make the central bank’s annualized 0.5 per cent quarterly growth estimate tough to reach.

The Bank of Canada, in its October Monetary Policy Report, said it expects fourth-quarter GDP to expand at an annualized rate of one per cent.

“Given the loss of momentum we are seeing, the (Bank of Canada’s) prediction of a recovery to a one per cent pace into year-end is looking tenuous at best,” David Rosenberg, president of Rosenberg Research & Associates Inc., said in a note. “As if one per cent is anything to write home about when you consider what the (Bank of Canada) has already done,” referring to its series of interest rate cuts to 2.25 per cent from five per cent in June 2024.

But if the economy manages to expand by 0.5 per cent in the third quarter, Canada will technically skirt a recession by avoiding a second consecutive contraction after pulling back 1.6 per cent annualized in the second quarter.

September GDP will rebound to a “tepid” 0.1 per cent from a 0.3 per cent drop in August, Statistics Canada projected, putting the economy on track to grow 0.4 per cent, Rosenberg said.

He isn’t the only one questioning the Bank of Canada’s GDP forecasts.

JPMorgan Chase & Co. analysts are calling for third-quarter growth to come in lower because of slowing personal consumption and “weakness” in fixed investments.

“While implied quarterly growth based on Statistics Canada’s monthly output-based indicator points to a very soft, but still positive outturn in (the third quarter), downbeat retail sales data portends a weaker result,” its analysts said in a report.

Retail sales contracted 0.7 per cent in September from the month before, according to Statistics Canada on Nov. 21, matching a survey of economists by Bloomberg. The agency’s flash estimate for October is calling for sales to come in flat.

JPMorgan said it expects consumer spending to remain soft for the remainder of the year, “reflecting increased caution amid ongoing economic uncertainty and a weaker labour market.”

It also said a lack of clarity on trade between Canada and the U.S. due to the American government shutdown clouds the third-quarter outlook.

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“We have less visibility on the contribution from net trade than usual — the U.S. government shutdown has delayed the release of Canada’s September trade data — but we think that it was about neutral last quarter,” JPMorgan analysts said. “A large net trade drag pushed growth into negative territory in (the second quarter) despite strong household consumption.”

Moody’s Analytics, part of Moody’s Ratings, said it expects Canada’s third-quarter GDP to come in flat given that many of Statistics Canada’s monthly forecasts for growth this year have ended up being revised downward.

“Problematically, a closer look at the preliminary projection’s recent track record suggests the sneak peek has become overly optimistic,” Brendan LaCerda, director of economic research at Moody’s Analytics, said in a note.

For example, Moody’s said Statistics Canada’s flash GDP forecasts in 2024, when the economy was expanding, were split between overestimating and underestimating. In 2025, monthly GDP outlooks from January to August were revised downward by 0.1 per cent points on average.

The ratings agency said that was likely because Statistics Canada’s advance surveys — it polls companies to produce the flash estimate — can’t distinguish between companies that don’t respond and those that have closed.

As a result, Moody’s is urging caution on the upcoming GDP data.

“Notably, if the recent pattern holds, then the September estimate for slight growth will get erased, and third-quarter GDP growth will come in around zero,” La Cerda said.

Economists at five of Canada’s Big Six banks, including Royal Bank of Canada, Bank of Montreal, National Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, expect third-quarter GDP to match the Bank of Canada’s estimate. Canadian Imperial Bank of Commerce is calling for third-quarter GDP growth of 0.7 per cent.

However, several of the banks’ economists warned that the missing U.S. trade data could result in GDP revisions.

Economists at National Bank of Canada said last week’s retail numbers point to a weak passing of the baton into the fourth quarter.

“Looking ahead to (the fourth quarter), September’s weakness doesn’t provide a particularly strong hand-off and Statistics Canada’s October flash estimate for nominal sales suggests no growth,” Ethan Currie and Taylor Schleich said in a note. “As such, we’re likely to see below-potential growth continue into the fourth quarter.”

Bradley Saunders, North America economist at Capital Economics Ltd., said he expects household spending will continue to deteriorate in the fourth quarter after slowing to an annualized one per cent rate in the third quarter from 4.5 per cent in the second quarter.

“After bravely keeping the economy afloat through the intense trade uncertainty, consumer spending seems to be taking a breather,” he said in a note.

• Email: gmvsuhanic@postmedia.com

The Bank of Canada’s forecast for third quarter growth is looking iffy, these economists warn

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