For the first time since the recession, the Canadian economy is enjoying an uptick, surprising experts and renewing optimism in better economic times ahead. According to the latest numbers released by Statistics Canada, growth reached 2.7 per cent in Q3 – the strongest since 2011, and bypassing the 2.5 per cent rate previously forecasted by economists, with GDP rising to 0.3 per cent.
In comparison, the economy grew by only 1.6 per cent in Q2.
Business Investment Driving Growth
Increased investment by businesses is the driving force behind the economy’s strong showing. Spending rose by 0.6 per cent, as businesses shelled out for non-residential structures, machinery and equipment and intellectual property products. Spend-happy businesses are a good indicator of happy economic times; Department of Finance Minister Jim Flaherty has been urging them to spend more since the recession, rather than sit on coffers of stockpiled emergency cash.
Other external factors, like recovery from the Albertan summer floods and the end to the Quebec construction strike, are credited with contributing to growth.
Part-Way To Capacity
Business spending is part of a two-pronged approach to economic recovery; economists have predicted that will be reached in 2015 when business investment and the exports industry each contribute 1.1 per cent to the economy. For the time being, though, exports have yet to catch up – they declined by 0.5 per cent in Q3, as the U.S., our largest trading partner, continues to experience economic tremors of its own, and global economies remain volatile.
Once both have reached their desired levels and the “output gap” has been closed, the Bank of Canada will likely raise its benchmark rate from one per cent, as Canada will be less dependent on low interest rates for economic stimulation.
Housing Market Still A Leading Contributor
Home buyers have been supporting the economy for some time – the Bank of Canada has kept their aforementioned rate at record lows since 2010, prompting low mortgage rates and high home buying demand. While new construction seems to be slowing nationwide (down 2.9 per cent, the third decline in as many quarters), the resale market is booming – it’s up 0.6 per cent, while costs from home transfers rocketed by 8.1, illustrating the “continued strength in sales of existing homes”. Renovations also increased by 1.1 per cent.
Spending Is Down, Saving Is Up
The StatsCan numbers show we’re saving more – household saving is up 5.4 per cent, as household disposable income outpaces that of consumption expenditures.The debt to service ratio, which is calculated based on household mortgage and non-mortgage interest paid divided by disposable income, is at a record low of 7.17 per cent.
Household spending grew by 0.6 per cent, which is a decline from 0.9 in Q2. While there was a boost to spending on goods, services, gas, water and financial services, Canadians appear to be buying fewer cars, down by 0.6 per cent.