Posthaste: Why the Bank of Canada keeps overshooting on GDP forecasts and what it means for interest rates

Pinning down third quarter growth has been a real thorn in the central bank's side

The third quarter has been a real thorn in the side of the Bank of Canada when it comes to trying to pin down gross domestic product, and the latest data is only causing policymakers more grief.

In the central bank’s October Monetary Policy Report (MPR), it forecasted third-quarter GDP of 1.5 per cent, a big drop from its 2.8 per cent estimate in July. After the GDP data release on Thursday, the central bank’s revised estimate for the quarter is looking like another overshoot.

Statistics Canada’s flash estimate for September GDP of 0.3 per cent, as well as zero growth in August and revised 0.1 per cent growth in July, means growth likely came in at one per cent annualized for the third quarter.

“Forecasting is a tricky business,” Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, said in an email. “In fairness to (policymakers), they didn’t know when they set the forecasts in July that wildfires and strikes, including work stoppages at railways, among others, would pose as much risk to near-term growth.”

He said Scotiabank in the summer had a third-quarter GDP forecast of 2.2 per cent, though the Bank of Canada’s estimate “surprised us to the high side at the time.”

Stephen Brown, assistant chief North America economist at Capital Economics Ltd., also cited “temporary factors” such as the wildfires and railway lockouts for wreaking havoc with the Bank of Canada’s GDP projections.

“Although the actual stoppages were very short-lived, there was nonetheless a big drop in rail traffic as exporters didn’t want to risk their products being stranded,” he said in an email.

Capital Economics estimates the wildfires and railway stoppages combined took a 0.4 percentage point chunk out of third-quarter growth.

But that’s not all that tripped up policymakers.

Michael Davenport, an economist at Oxford Economics Canada, said the opening of the Trans Mountain Pipeline expansion didn’t deliver the GDP boost that the central bank expected.

“In its July Monetary Policy Report, the Bank of Canada expected a strong pickup in exports to drive growth in Q3, mainly reflecting an increase in oil exports from the opening of the Trans Mountain Pipeline expansion,” he said in an email. “We haven’t yet seen evidence of a substantial pickup in energy exports in Q3.”

Charles St-Arnaud, chief economist at Alberta Central, also thinks exports turned out to be a letdown for the central bank and its projections, especially the July MPR forecast of 2.8 per cent, which “was much higher” than everyone else had.

“We haven’t seen at all the level of exports that the Bank of Canada was expecting,” he said, adding that volumes have essentially been flat going back to early 2023.

Other areas where the central bank overestimated growth included consumer spending and the real estate sector, Davenport said.

But what, if anything, do these misses mean for the Bank of Canada’s path on interest rate cuts?

If policymakers’ expectations for GDP had come closer to the real numbers, economists don’t seem to think interest rates would have come down in larger increments sooner.

In September, there didn’t yet exist a case to “go so quickly,” given what was happening with inflation, which rose 2.5 per cent year over year in August, the most recent reading available to the Bank of Canada for its rate decision that month, St-Arnaud said.

Holt said the unexpected weakness in GDP, which speaks to having “more spare capacity in the economy than had been forecast,” helped push the Bank of Canada to cut by an oversized 50 basis points at its interest rate announcement on Oct. 23. Prior to that, the central bank had implemented three 25 basis-point cuts starting in June.

“So, upsizing the size and pace of cutting is about getting growth back up as quickly as possible in order to stem the tide somewhat,” he said.

Looking ahead, St-Arnaud said the cuts to immigration levels will amount to a big hit on GDP next year and make the work of forecasting that much more difficult.

“The massive fall in population growth will really complicate the work of the Bank of Canada,” he said, since it adds volatility in an area typically characterized by stability. “Life is pretty complicated right now and the bank’s models are not built for those kinds of gyrations.”

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Growth in the Canadian economy remained unchanged in August, putting gross domestic product on track to grow at an annualized rate of just one per cent in the third quarter, Statistics Canada said on Thursday, paving the way for another cut by the Bank of Canada in December.

The third-quarter reading includes an early estimate for growth increasing by 0.3 per cent in September. — Jordan Gowling, Financial Post

Read the full story here.

• U.S. jobs numbers for October will set the stage for the Federal Reserve’s rate decision on Nov. 7.
• Today’s data: S&P Global Canada manufacturing purchasing manager’s index for October
• Earnings: Exxon Mobil Corp., Chevron Corp., Magna International Inc., Enbridge Inc., Air Canada

• Canadian Natural Resources to boost TMX usage as profit falls
• Ottawa should ‘be very careful of large, abrupt shifts’ in immigration, economists say
• What Canada’s lagging GDP might mean to the Bank of Canada
• Bank of Canada oversight of retail payment providers launches Friday
• Arlene Dickinson: Canada’s entrepreneurs have a strategic vision — where are our politicians?

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Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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