Current conditions

Canadian economic activity is evolving largely as expected. Inflation is now near the middle of the Bank of Canada’s control range of 1% to 3%.

Growth in quarterly gross domestic product (GDP) has been around 2%, while the labour market continues to soften. The economy remains in excess supply.

Inflation fell to 1.6% in September from 2.7% in June, primarily due to lower energy prices. While inflation in shelter prices has come down, it remains elevated. Price pressures have moderated across a broad range of other goods and services. The Bank’s preferred measures of core inflation, CPI‑median and CPI‑trim, have eased to 2.3% and 2.4% respectively.

Economic activity

The Canadian economy expanded by about 2% in the first half of the year, and the available data suggest a slightly slower pace of growth—about 1½%—in the third quarter (Chart 1).

Growth in domestic demand is estimated to have eased in the third quarter, reflecting slower growth in both business investment and government spending. In contrast, growth in exports is estimated to have picked up.

The growth in GDP reflects still-strong population gains and a further decline in GDP per person. In the third quarter:

• Population growth is estimated to have been around 2¾%, down slightly from about 3% in the first half of the year.
• GDP per person likely declined by about 1¼%, a somewhat larger decrease than the average over the first half of the year.

Domestic demand growth has slowed

Growth in final domestic demand is estimated to have eased to 1.5% in the third quarter, down from 2.75% in the first half. This slowdown reflects softening growth in business investment and government spending.

The available data suggest that consumption growth was about 1¾% in the third quarter, broadly in line with the first half of the year. But on a per-person basis, consumer spending is estimated to have continued to decline (Chart 2).

This weakness in spending per person is likely due to the restrictive impact of past increases in interest rates and the soft labour market. For example, youths—who typically spend a greater share of their income on consumption than most other Canadians—have experienced a larger increase in unemployment than other age groups as the labour market has slowed.

Past increases in interest rates are also affecting the savings rate, which reached about 8% in the third quarter. This is materially higher than its average level of about 3% between 2010 and 2019. Two main factors are at play: returns on savings are relatively elevated, and some households may have set aside extra funds in anticipation of having to renew their mortgages at higher rates.

Growth in both business investment and government spending has eased

Business investment is estimated to have declined modestly in the third quarter. This decrease reflects a reversal of the surge in investment in transportation equipment during the second quarter as well as subdued business sentiment (Chart 3).

Growth in government spending is also estimated to have slowed from a strong pace.

After contracting for three consecutive quarters, residential investment is estimated to have picked up in the third quarter:

• Resales and new construction have started to recover, partly due to recent declines in interest rates and pent-up demand.
• However, high costs for materials and labour and subdued growth in house prices still appear to be weighing on renovations, which could restrain residential investment spending from picking up in the near term.

Export growth has strengthened

Export growth is estimated to have increased modestly in the third quarter. The expanded capacity provided by the Trans Mountain Expansion pipeline is driving the rise in energy exports. However, this strength from energy exports is partially offset by weakness in exports of motor vehicle parts, which have been impacted by temporary maintenance shutdowns at US production facilities.

Responses to the Bank’s latest surveys of Canadian businesses show that exports have emerged as a source of growth (Chart 4). Businesses linked to natural resources are expecting the pickup in export growth to continue.

Imports are estimated to be weak, reflecting a decline in motor vehicle imports following strength in the second quarter, along with a pullback in machinery and equipment investment.

Capacity pressures

The Canadian economy continues to be in excess supply. The share of businesses reporting labour shortages is below its historical average (Chart 5).

The output gap is estimated to be roughly unchanged at between -1.75% and -0.75% in the third quarter.

Labour market is soft

The labour market continues to soften. Employment growth has been modest, while the labour force has continued to expand due to strong population growth (Chart 6). The job finding rate has gone down as businesses’ hiring intentions remain muted. The unemployment rate was 6.5% in September.

Since the labour market began to cool in early 2023, the increase in the unemployment rate has been concentrated among newcomers and youths (see In focus: The factors behind the rise in unemployment; Chart 7).1 Overall, the labour market is in excess supply.

Wage growth remains elevated at around 4% (Chart 8).

Inflation

Consumer price index (CPI) inflation is now close to 2%, and inflationary pressures are no longer broad-based (Chart 9). The Bank’s preferred measures of core inflation, CPI-median and CPI-trim, are at 2.3% and 2.4%, respectively.

The easing in inflation since the July Report has been largely due to lower energy prices. However, inflation in other components also continues to moderate. Shelter price inflation has shown signs of easing but remains the largest contributor to overall inflation.

Inflation is more dispersed than usual

CPI inflation has come down from 2.7% in June to 1.6% in September. Inflation in many components of the CPI, particularly those for goods, is below historical averages (Chart 10, blue bars). At the same time, inflation for a few components, mostly services, is above historical averages (Chart 10, red bars).

Another way to look at the dispersion of inflation is to examine the weighted distribution of CPI components and compare the distribution in September 2024 with the distribution seen between 1995 and 2019 (Chart 11). The comparison shows that inflation is currently being pushed up and pulled down more than usual by components that are materially above and below 2%.

Goods price inflation remains weak

CPI inflation is being pulled down by declines in the prices of goods. Inflation for goods eased to -1% in September. This fall in inflation reflects widespread downward pressures, including an easing in inflation for non-durables and outright price declines in energy, durables and semi-durables. Past decreases in global cost pressures and excess supply are exerting a drag on goods price inflation.

Endnotes