The Bank of Canada’s economic outlook continues to be lacking

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The third quarter was a real thorn in the side Bank of Canada when it comes to trying to establish gross domestic productand the latest data only causes more pain for policymakers.

In the central bank’s October Monetary Policy Report (MPR), it estimated the third quarter GDP of 1.5%, a big drop from its estimate of 2.8% in July. After the release of GDP data on Thursday, the central bank’s revised estimate for the quarter looks like a further overshoot.

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Statistics Canada flash estimate for September GDP of 0.3 percent, as well as zero growth in August and a revised 0.1 percent increase in July, means growth likely came in at an annualized percentage for the third quarter.

“Forecasting is a complicated business,” Derek Holt, vice president and head of capital markets economics at Bank of Nova Scotiasaid in an email. “In fairness to (politicians), they didn’t know when they set the forecasts in July that forest fires and strikes, including railway work stoppagesamong other things, it would pose just as much risk to short-term growth.”

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

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

“Although the actual shutdowns were of very short duration, there was still a large drop in rail traffic as exporters did not want to risk their products being blocked,” he said in an email.

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Capital Economics estimates that wildfires and rail shutdowns combined took a 0.4 percentage point share of third-quarter growth.

But that’s not all that has stopped policymakers.

Michael Davenport, economist at Oxford Economics Canada, said the opening Trans Mountain Pipeline Expansion it did not deliver the GDP growth the central bank was expecting.

“In July Monetary Policy ReportThe Bank of Canada expected strong export growth to boost growth in Q3, mainly reflecting an increase in oil exports since the opening of the Trans Mountain Pipeline expansion,” he said in an email. “We have yet to see evidence of a substantial increase in energy exports in Q3.”

Charles St-Arnaud, chief economist at Alberta Central, also believes that exports have proven to be a disappointment for the central bank and its projections, particularly the July MPR forecast of 2.8%, which “has was much bigger’ than everyone had.

“I haven’t seen the level of at all exports that the Bank of Canada expected,” he said, adding that volumes were essentially unchanged since early 2023.

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They also included other areas where the central bank overestimated growth consumer spending and the the real estate sectorDavenport said.

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

If politicians’ expectations of GDP had come close to actual figures, economists don’t seem to mind interest rates it would have decreased earlier in larger increments.

As of September, there had yet to be a case that “went that fast” given what was going on inflationwhich rose 2.5 percent 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 forecast,” helped push the Bank of Canada to cut 50 basis points at its Oct. 23 interest rate announcement. Before that, the central bank implemented three 25 basis point cuts starting in June.

“So increasing the size and pace of cutting is about getting growth back as quickly as possible to kind of stem the tide,” he said.

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Looking ahead, St-Arnaud said the cuts at immigration levels it will have a big impact on GDP next year and will make the job of forecasting much more difficult.

“Massive fall population growth it’s going to really complicate the work of the Bank of Canada,” he said, as it adds volatility to an area usually characterized by stability. “Life is pretty complicated right now and bank models aren’t built for those kind of spins.”

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Growth in Canadian economy remained unchanged in August, putting gross domestic product on track to grow at an annual rate of just 1 per cent in the third quarter, Statistics Canada said Thursday, paving the way for another Bank of Canada rate cut in December.

The third-quarter reading includes an early estimate of a 0.3 percent rise in September. —Jordan Gowling, Financial Post

Read the full story here.

• US jobs numbers for October will set the stage for the Federal Reserve’s rate decision on November 7.
• Today’s dates: S&P Global Canada Manufacturing Purchasing Managers’ Index for October
  
• Earnings: Exxon Mobil Corp., Chevron Corp., Magna International Inc., Enbridge Inc., Air Canada
  

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

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