Canadian Economic Growth Slows in Third Quarter on Export Decline -- 2nd Update

By Paul Vieira Features Dow Jones Newswires

The Canadian economy slowed markedly in the third quarter after posting its best 12-month run in over a decade, as stoppages and maintenance work at auto-assembly plants led to a decline in exports.

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Still, growth in Canada on a one-year basis stood at roughly 3%, positioning the economy among one of the best performers in the Group of Seven leading industrialized nations.

Canada's gross domestic product, or the broadest measure of goods and services produced in an economy, rose at a 1.7% annualized rate in the third quarter to 1.85 trillion Canadian dollars ($1.44 trillion), Statistics Canada said Friday. Market expectations were for a 1.6% annualized gain.

That marks a moderation in expansion from the second quarter, after GDP increased 4.3% versus an earlier estimate of 4.5%.

A moderation in growth was widely expected. Canadian exports fell 2.7% in the July-to-September period on a nonannualized basis, due mostly to disruptions at automobile factories as companies performed maintenance work or retooled production lines to accommodate new models; and a labor strike at General Motors Co.'s factory in Ingersoll, Ont.

The last time exports declined this much was in the first quarter of last year, due to the swoon in energy prices.

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Also, investment in housing slipped 0.4% in the third quarter, after a 0.9% drop in the previous quarter -- marking the first time since early 2013 that spending on residential real estate fell for two straight quarters. This reflects measures introduced in the province of Ontario to curb 30%-plus annual gains in Toronto-area housing prices.

Offsetting the steep drop in exports were consumer spending, which rose 1% as households increased their outlays on both services and goods, and a pickup in business inventories, to C$17.16 billion in the third quarter from C$12.14 billion in the previous three-month period.

Aside from the decline in exports, analysts said the GDP report was decent otherwise. TD Bank economist Brian DePratto said Canadian consumer spending remained solid, while government stimulus through infrastructure spending helped lift output.

"All told, we wound up with a much more 'normal' pace of growth, consistent with an economy entering the mature phase of the economic cycle," Mr. DePratto said.

Meanwhile, U.S. data indicated economic output expanded at a 3.3% annualized rate in the third quarter, and the U.S. economy is running at is full potential for the first time in a decade. The Bank of Canada suggests the Canadian economy is close to hitting full potential -- or the level of growth an economy can reach before triggering inflationary pressure -- although it contends there is some spare capacity remaining in the labor market.

Third-quarter growth in Canada was just shy of the Bank of Canada's call for 1.8% annualized expansion. The central bank expects growth to pick up in the fourth quarter, advancing 2.5%, and the economy to grow at a more sustainable pace after a stellar run.

The central bank has signaled its readiness to take a cautious approach on rate policy, until it has a better sense of how indebted households respond to two interest-rate increases earlier this year. It is also watching developments on the trade front, with talks aimed at revamping the North American Free Trade Agreement hitting a crucial stage.

Furthermore, new mortgage-financing rules from Canada's banking watchdog take effect in January, which is expected to slow demand for housing.

The Bank of Canada issues its next rate-policy decision on Wednesday and it is widely expected to stand pat. Meanwhile, the Federal Reserve is expected to raise its benchmark rate this month.

Friday's Canadian data also indicated GDP in September advanced 0.2% from the previous month, versus the consensus 0.1% call. The energy sector rebounded after declines in three straight months, climbing 1.1% from the previous month. Industrial production rose 0.4%.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

December 01, 2017 10:14 ET (15:14 GMT)