Canada's economic growth slows to crawl, but Flaherty vows no new big spending

Canada's economy has hit stall speed with few areas of strong support, setting back any talk of interest rates hikes in the new year.

OTTAWA – Canada’s economy has hit stall speed with few areas of strong support, setting back any talk of interest rates hikes in the new year and likely restarting calls for more government action.

The economy slumped to 0.6 per cent in the third quarter — below even the gloomy 0.8 consensus and about one third what the Bank of Canada had predicted as recently as the summer — as trouble loomed on the export side, housing and business investment.

In addition, Statistics Canada revised downward the second quarter one notch to 1.7 per cent and September, the final month of the third quarter, was flat, meaning the handoff to the current fourth quarter was weak.

Opposition MPs blasted the government’s economic management in the Commons on Friday, but speaking in Victoria, Finance Minister Jim Flaherty said he remains opposed to any big spending.

That doesn’t mean he isn’t open to redirecting funds toward measures that promote economic growth, he added.

“It’s not as if I don’t expect to hear good ideas, I do,” Flaherty said of the pre-budget meetings he’s holding across the country.

“It’s not as if there won’t be new initiatives and reallocating of resources. What there won’t be is any large, multi-billion dollar spending initiatives which would create a structural deficit for the government of Canada.”

Economists said Flaherty likely won’t veer off course sharply unless Canada falls back into recession. That is dependent not on domestic factors, but on whether the U.S. avoids its fiscal reckoning in January, and Europe manages to keep the debt wolf at bay.

Still, the third quarter performance is worrying, they said, and not least because, if anything, the details were worse than the bottom-line numbers, which were bad enough.

“Certainly we are seeing strong headwinds. There’s not many cylinders firing at all except for the consumer and we don’t know how long the consumer can continue to carry the load,” said Peter Buchanan, a senior economist with CIBC.

Desjardins Capital Markets economist Jimmy Jean noted that without the inventory build-up of as yet unshipped goods, Canada’s third quarter economy would have fallen into a hole.

There was no talk yet of a technical recession — defined as two consecutive three-month periods of contraction — but Jean said the outlook for the last quarter of 2012 is not good. Given the weak handoff from September, he said the economy would need to work hard to eke out a one per cent advance.

The one silver lining in the report was that some of the export decline, particularly in the oil and gas sector, may have been the result of temporary production shutdowns.

The big shock in the third quarter report was that business investment, which the central bank has been counting on to support the economy, fell two per cent per cent annualized, and residential construction dived 4.4 per cent.

Economists lay the steep housing drop on Flaherty’s decision to tighten mortgage rules on July 9, which has taken the steam out of Canada’s previously hot real estate market.

Jean said he believes the decision was still the correct one, although the economy is paying a price now.

“Yes it is affecting the economy and it’s creating a drag, but on a long-term perspective it’s still the better outcome than facing a pure housing market crash and not having done anything about it,” he said.

Economists said the economy’s performance takes any chance of interest rate hikes off the table, likely until 2014.

The federal government is likely to come under pressure to bump up spending, or at least slow down its austerity program, but that is also unlikely barring a far worse outcome in the fourth quarter or early part of 2013.

In a letter to opposition MPs issued Thursday, the finance minister said he was in no mood to receive suggestions that he should increase spending or raise taxes.

“I will continue to stand against costly, new spending initiatives that would increase the size of government and throw Canada off track for balanced budgets,” he said.

As expected, net trade also weighed heavily on the economy in the third quarter as exports plunged 7.8 per cent on weak global demand and soft commodity prices.

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