Economy grows faster than expected, raising odds of higher interest rates

The Bank of Canada expected the economy to grow at a slower rate in the third quarter than it did.

It would be good to hear evidence of strong growth. The Bank of Canada is trying to contain the fastest inflation in 30 years by raising the cost of borrowing. Governor Macklem has raised the benchmark rate by 3.5 percentage points since March in a bid to smother inflation that peaked at eight percent over the summer.

Macklem told the House finance committee that the economy is overheated.

Macklem dislikes Statistics Canada's tally of gross domestic product. The agency reported that GDP grew at an annual rate of 2.9 per cent in the July-September period, slower than the previous quarter, but stronger than the 1.5 per cent pace that the Bank of Canada foresaw in its latest economic outlook.

The results show that the economy was able to push through the Bank of Canada's aggressive approach to interest rate increases. The central bank, which was caught flat-footed as inflation surged in the aftermath of the COVID recession, now tries to catch up to inflation that has surged far ahead of its two per cent target for year-over-year increases. Policymakers will update policy on Dec. 7 with the latest GDP reading.

Benjamin Reitzes, an economist at Bank of Montreal, said in a note to his clients that there was nothing he could do to stop the Bank of Canada from hiking rates.

Statistics Canada said that the increase was due to exports, investment in non-residential structures and stockpiling. The growth in those corners of the economy was partially offset by drops in housing investment and consumer spending, both of which would be the first to suffer from higher borrowing costs and inflation's burden on the cost of living.

The headline GDP number was flattered by surging prices for Canada's exports of oil, natural gas and farm commodities, but the housing and consumer spending data may be sending a truer signal.

Demand for goods such as new trucks and furniture fell in the third quarter as household consumption declined. The household savings rate went up to 5.7 per cent in the third quarter from 5.1 per cent in the second. Investment in residential structures fell for a second quarter in a row.

Statistics Canada reported that GDP increased by 0.1 per cent in September from the previous month. The Bank of Canada's interest rate increases will bite in the fourth quarter as preliminary data shows the economy was unchanged in October.

The economist at Toronto-Dominion Bank said there were worrying trends under the headline. Consumer spending has been affected by rising interest rates and high inflation, but should continue through the year.

The email address is kcarmichael@postmedia.