Big-Spending Canadians Take a Breather to Ease Economy's Growth

(Bloomberg) -- Canada's relentless consumer may finally be wavering.

Statistics Canada releases third quarter output data Friday that's likely to show the economy's strong run of growth is over. The increase in gross domestic product probably slowed to less than a 2 percent annualized pace between July and September, economists predict, less than half the rate in the first six months of this year.

The quarter also may mark the start of what analysts believe will be a gearing down in spending by the nation's highly indebted households that will act as a long-term drag. Future GDP growth is seen limited to no more than 2 percent as consumer spending slows to some of the weakest levels on record outside of recession.

The economy has been growing “on the backs of the consumer” and “that's clearly unsustainable,” said David Stonehouse, a Toronto-based portfolio manager who helps oversee C$6 billion ($4.7 billion) in fixed-income assets at AGF Management Ltd.

The GDP data is due at 8:30 a.m. Ottawa time, along with November jobs numbers. Economists surveyed by Bloomberg forecast annualized growth of 1.6 percent in the third quarter, down from 4.5 percent in the second quarter. The big drag in the third quarter comes from a sharp drop in exports -- plagued by temporary plant shutdowns -- that should reverse by the end of the year.

Lasting Slowdown

An expected slowdown in consumption however will be more lasting. Household spending growth is expected to slow to 2.8 percent in the third quarter, the slowest pace in a year, from 4.6 percent in the prior period.

And consumption is expected to continue slowing in coming quarters, with economists forecasting quarterly annualized growth of 1.6 percent by the start of 2019.

Bank of Canada economists have come to similar conclusions. According to the central bank's latest projections, consumer spending's contribution to growth over the next two years will be near record lows outside of recession, adding 1.3 percentage points to total growth in 2018 and 1 percentage point in 2019. That would be down from 2.1 percentage points in 2017.

By 2019, overall GDP growth is projected to slow to 1.5 percent -- half the 3 percent rate projected for 2017 -- as households pull down economic activity.

Household spending has carried the country's economy for much of the decade since the 2008-2009 recession, particularly in the two years following the collapse of oil prices in 2014 when it accounted for just about all of Canada's economic growth.

Consumers, benefiting from a buoyant jobs market and rising home values, accelerated their spending in the first half of this year, when household consumption rose at an annualized 4.6 percent pace in the second quarter, following a 4.8 percent gain in the first quarter. That's the best two-quarter gain since before the 2008 recession.

But a mounting debt load -- Canadian households are carrying more than C$2 trillion of debt, driven in large part by soaring home prices in major cities -- will take a toll, particularly as the Bank of Canada raises interest rates. In the long term, consumption will be subject to the same source of structural constraints hampering potential growth in the rest of the economy: low productivity and aging demographics.

“What we've seen over the past three quarters isn't anywhere near a sustainable rate of growth,” said James Marple, senior economist at Toronto-Dominion Bank.

Of course, economists and policy makers have long underestimated the ability of the consumer to dominate the growth story. At the start of last year, the Bank of Canada was forecasting a contribution to growth for consumption in 2017 of half its latest estimates. 

But Canada's consumption-led growth model is approaching its limits. It may work when the economy has plenty of spare capacity, as has been the case for a decade. It works less well when the economy is running up against constraints, as it is now.

Faster-than-expected growth in the first half of the year led the central bank to raise interest rates for the first time in a decade, with moves in July and September.

Much will depend on other engines of growth, particularly business investment that not only bolsters the economy today but gives it more scope to grow in the future. And here the numbers are looking better. Investment is poised to be the strongest part of Friday's GDP report, with economists calling for a 4.6 percent annualized expansion in gross fixed investment.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier

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