Manufacturing GDP Analysis – September 2017

Uptick in September salvages a poor third quarter for the Canadian economy

It has become something of a stylized fact that Canada has enjoyed strong economic growth so far in 2017. Unfortunately, that sentiment is somewhat outdated. The economy has been riding the momentum of a short burst of growth from about last November through to about June. Since then, there has been very little positive news of any kind, which was reflected in the September and third quarter GDP numbers, both of which were released today.

Beginning with the monthly figures, the Canadian economy did pick up in September, with fairly widespread gains across major industry groupings. Overall GDP rose by 0.22 per cent that month, equivalent to an annual growth rate in the range of 2.6 per cent. While not a breakneck pace, that growth represents a significant improvement over the previous two months, during which time there was effectively no growth at all.  

That increase also helped salvage Canada’s third quarter GDP numbers for 2017. The economy grew at an annualized rate of about 1.7 per cent over the summer, a significant drop compared to the mini-boom of early 2017; annualized growth in Q1 came in at 3.6 per cent, rising to 4.2 per cent in Q2.

The slower growth in Q3 was largely the result of a sharp drop in export activity. GDP in exports plunged by 10.7 per cent (on an annualized basis) over the summer – in part because of a major slowdown in motor vehicles trade between Canada and the United States.

Meanwhile – and as per usual these days – consumer spending made up the difference.  Household expenditures rose by nearly 4.0 per cent in the third quarter and has been driving economic growth in Canada for years. There was also a surge in government spending over the summer that helped offset the decline in exports. Government purchases of goods and services rose by 2.9 per cent, while construction of infrastructure projects contributed to a 12.8 per cent spike in capital spending. 

Finally, business investment – which is critical to long-term growth and competitiveness – continued its gradual recovery. Business capital spending had been in freefall since the drop in oil prices in 2014, but finally began to turn around earlier in the year. Although investment growth is much slower than it was earlier in the year, it at least remains in positive territory; in Q3, business capital spending rose by an annualized rate of about 1.5 per cent.

Turning back to the monthly (industry-based) numbers for September, nearly all major industry groupings posted gains. Leading the way were resource-extracting industries, which saw value-added activity rise by $989 million, or about 7.9 per cent on an annualized basis. There were also strong gains in utilities; finance, insurance and real estate, and professional services.

Only four of the 15 major industrial categories saw slower growth in September. By far the largest of those was in wholesale and retail trade, where GDP fell by almost $1.5 billion in a single month. Most of that decline was in wholesale activity related to personal and household goods – potentially reflecting the fallout of announced closures by Sears Canada.

Manufacturing was one of the four sectors where GDP fell in September, declining by a very modest 0.3 per cent on an annualized basis compared to August. However, solid growth earlier in the year has meant that manufacturing GDP is still tracking well above last year’s levels. Value-added output in September was 2.5 per cent higher than it was twelve months earlier, and through nine months, the sector is tracking 3.0 per cent higher compared the three-quarter point of 2016.

Within the sector, results were mixed with six of the 11 major industries recording losses and five showing gains. On the negative side, there were notable losses in three main industries – primary metals (down $350 million), plastics and rubber products ($289 million lower), and motor vehicles and parts ($286 million lower). On the positive side, there were strong gains in petroleum refining as rising oil prices helped add value to that sector; petroleum and coal refining GDP was up $269 million compared to August. There were also solid gains made in the paper products and chemicals industries.