The Canadian economy staged a third-quarter rebound, but the solid performance does not preclude a cut in interest rates by the Bank of Canada.
Real third-quarter gross domestic product grew at an annual rate of 2.1%, after falling 0.6% in the second quarter. But almost all growth stemmed from booming U.S.-Canada trade (chart). Exports surged by a 9.9% pace while imports grew by 0.8% last quarter. On Nov. 30, Statistics Canada reported separately that the current account deficit narrowed to C$3.39 billion (U.S. $2.5 billion) in the third quarter, the smallest deficit in eight years.
The turnaround in trade is the result of a cheap Canadian dollar and a robust third-quarter economy in the U.S., which purchases 80% of Canada's exports. Export growth may not be as strong this quarter, though, because the U.S. economy is slowing and the Canadian dollar has stabilized at an admittedly weak exchange rate of around 73 U.S. cents.
That means Canadian growth will depend on domestic demand, and the news here is not all good. Business spending is likely to rebound after it unexpectedly fell by 2.2% last quarter. But consumer spending, up 2.5% in the third, may be held back by extremely low confidence readings and a weakening job market. In November, the unemployment rate remained at 9.4% as payrolls lost 44,000 jobs after a small 20,000 gain in October.
The economy also will be hurt by cutbacks in public spending at both the federal and provincial levels. On Nov. 29, the recently elected government in Ontario announced the largest spending cuts in its history: a total of about 10% for the 1996-97 fiscal year.
Private analysts forecast that real GDP is likely to grow at about 2% this quarter, but tighter fiscal policy, along with the firmer tone of the dollar, is raising expectations in the financial markets of a rate cut by the Bank of Canada. The odds are, though, that the BOC will wait until after the U.S. Federal Reserve sets its own agenda on Dec. 19.