Key Takeaways:
- The Canadian economy likely rebounded slightly in November after a contraction in October, but the fourth quarter is shaping up to be a weak one due to tariff-hit industries.
- The U.S. economy grew by 4.3% in the third quarter, the biggest gain in two years, but is expected to slow down in the fourth quarter due to the government shutdown.
- Canada’s softwood lumber sector has been hit hard by U.S. import taxes, with output from wood-product manufacturers shrinking 7.3% in October.
- The Bank of Canada held its benchmark policy rate at 2.25% earlier this month, citing the country’s resilience to U.S. tariffs and an inflation rate close to the bank’s 2% target.
- Strong job growth in Canada has been a marker of the country’s resilience, but it’s unclear how long this can hold.
Introduction to Canada’s Economic Performance
The Canadian economy likely experienced a slight rebound in November, with a preliminary estimate from Statistics Canada indicating a 0.1% expansion in industry-based gross domestic product. This follows a 0.3% decline in October, which was expected, but the breadth of the decline still caught the attention of economists. The two months of data suggest that the Canadian economy has some work to do to avoid another negative print for the final quarter of the year. Robert Kavcic, senior economist at BMO Capital Markets, noted that the contraction in October was widespread, with output falling in many sectors, including manufacturing, which contracted 1.5% and contributed the most to the month-over-month decline.
The Impact of Tariffs on Canadian Industries
Within manufacturing, most sectors were flat or down, with the biggest declines coming in trade-dependent industries such as electrical equipment, machinery, and wood-product manufacturing. The latter has been hit particularly hard, with output from wood-product manufacturers shrinking 7.3% in October. Canada’s softwood lumber sector has sounded the alarm that producers face enormous challenges during a period of high U.S. import taxes, warning of widespread effects on the communities and employees that depend on mills. U.S. import taxes on softwood currently total 45.16% on most Canadian producers, including anti-dumping and countervailing duties of 35.16% and new tariffs of 10%. This has resulted in a significant decline in the production of wood products, which is likely to have a ripple effect on the entire economy.
Comparison with the U.S. Economy
In contrast, the U.S. economy grew by 4.3% in the third quarter, the biggest gain in two years, according to new numbers released Tuesday. Households were a big driver of that growth, despite tariffs raising the prices of some goods, with U.S. consumption climbing at a 3.5% annualized rate in the quarter. However, growth in the U.S. is also expected to slow in the fourth quarter due to the 43-day government shutdown. The U.S. economy’s performance is closely watched by Canadian economists, as the two countries have a significant trade relationship. The impact of tariffs on the U.S. economy is also being closely monitored, as it could have a ripple effect on the Canadian economy.
Bank of Canada’s Interest-Rate Decision
The Bank of Canada held its benchmark policy rate at 2.25% earlier this month, citing the country’s resilience to U.S. tariffs and an inflation rate close to the bank’s 2% target. Strong job growth in Canada has been a marker of the country’s resilience, with employers adding 54,000 new jobs in November, which sent the unemployment rate down 0.4 percentage points to 6.5%. However, it’s unclear how long Canada’s job market resilience can hold, and the "unimpressive rebound" in November’s monthly GDP stands in contrast with a robust jobs report for that month. Andrew Grantham, a senior economist with CIBC Capital Markets, noted that the labor market data may weaken again ahead.
Conclusion and Future Outlook
In conclusion, the Canadian economy is facing a challenging quarter, with tariff-hit industries weighing on growth. The U.S. economy’s performance is also closely watched, as it could have a significant impact on the Canadian economy. The Bank of Canada’s decision to hold its benchmark policy rate at 2.25% is a sign of the country’s resilience, but it’s unclear how long this can hold. As the year comes to a close, it’s clear that the Canadian economy has some work to do to avoid another negative print for the final quarter of the year. The impact of tariffs, the performance of the U.S. economy, and the Bank of Canada’s interest-rate decisions will all be closely watched in the coming months.
