Trade Battle Curbs Investment, Taking Toll on Canada’s Economy

2/2 © Bloomberg. Workers repair an area for cleaning pipelines in Toronto, Ontario, Canada, on Wednesday, Jan. 11, 2017. 2/2

(Bloomberg) -- Heightened trade uncertainty over the summer seems to have taken a toll on Canada’s economy in the third quarter, prompting households to slow consumption and businesses to sharply curtail investment.

Statistics Canada released data Friday showing consumption spending grew at the slowest pace in more than two years, while businesses recorded an unexpected drop in investment and scaled back on inventories. Overall, the economy grew at a 2 percent annualized pace, largely due an improved trade picture as imports fell. Domestic demand -- which excludes trade -- was the weakest in more than two years, recording a slight contraction.

While the headline growth figure came in as economists had expected, the underlying numbers suggest the growing trade tensions over the summer -- eventually leading to a new deal with the U.S. and Mexico -- may have put at least a temporary chill on spending. That gives the Bank of Canada even more reason to remain on hold at its rate decision next week.

“Canada had a mediocre third quarter, with some troubling details for what lies ahead,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors. “These aren’t the sort of numbers that back a rate hike in December.”

Canada’s dollar was little changed after the report, trading 0.2 percent weaker on the day at C$1.3303 per U.S. dollar at 9:10 a.m. Toronto time.

Up until the summer, the economy had been doing relatively well even in the face of higher interest rates. It grew by a Group-of-Seven-best 3.1 percent in 2017, and expanded at a healthy 2.3 percent clip in the first half of this year in part due to stronger business investment. Third-quarter gross domestic product growth slowed from a pace of 2.9 percent in the second quarter.

Nafta Talks

But the summer saw relations between President Donald Trump and Prime Minister Justin Trudeau deteriorate, elevating worries a deal wouldn’t get done. Canada and the U.S. eventually reached an agreement to replace the North American Free Trade Agreement in late September.

The economy was also hobbled by a closure at the Syncrude oil-sands operation, which went down after a power outage -- adding to a weakening outlook for the country’s oil industry. The data also suggest rising interest rates are beginning to have an impact on consumers.

Consumption slowed to an annualized 1.2 percent pace in the third quarter, the weakest growth since the first quarter of 2016. That’s even as households scaled back on savings.

Sluggish business investment may be the biggest surprise in the data, with non-residential capital spending down an annualized 7.1 percent -- the first decline since the fourth quarter of 2016. Residential investment contracted for a third straight quarter, down an annualized 5.9 percent.

Demand Drops

For the three months between July and September, it all added up to sluggish domestic demand, down an annualized 0.1 percent in the third quarter.

September ended up being the worst month of the quarter, with data released Friday showing a 0.1 percent drop. That was the first monthly decline since January. Economists predicted an increase of 0.1 percent.

Because exports eked out a small 0.9 annualized increase in the third quarter, the contribution of trade on growth was large -- adding about 3 percentage points.

Another major drag on growth was a slowdown in inventory accumulation. That impact dragged down annualized growth by 1.3 percentage points.

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