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Canadian economic growth weakens because corporate investment is declining and consumers spend less

OTTAWA – The pace of economic growth in Canada slowed down in the third quarter as corporate investment spending slowed and household spending grew slower and raised questions about the future rate of interest rate hike by the Bank of Canada.

The Canadian economy grew by 2 percent in the third quarter, compared with 2.9 percent in the second quarter, reflecting the expectations of economists, according to Thomson Reuters Eikon.

Economists, however, said that details in the last reading of the economy show disturbing signs of weakness and adds that a separate report showed that the economy ended the quarter on a weak note.

The Bank of Canada raised its key interest rate target in October to 1.75 percent, the highest level in ten years. The expectation of investors is that the central bank will maintain its base rate at a week later by publishing the planned rates next week, but the expectation was that it would probably increase in January.

Paul Ferley, Deputy Chief Economist at Royal Bank, has pointed to a drop in business investment and a disappointing decline in housing investment.

And Ferley said that economic growth in the fourth quarter seems to be even slower.

"It looks like fourth-quarter growth could be closer to one percent than two," he said.

Ferley said he expects to raise interest rates in the first quarter, but it will depend on how the economy will differ, and if the slowdown in the last three months of 2018 turns out to be transient.

The third quarter ended in a weak signal, as real gross domestic product declined by 0.1 percent in September. Canadian statistics said that for seven consecutive months of growth, the first step was lower.

The agency recorded a decline in September to reduce production in all commodity production sectors, which fell by 0.7 percent. The service sector increased by 0.2 percent.

Stephen Brown, a senior Canadian economist at Capital Economics, said the fourth quarter would get a little bit of support from Syncrude's recovery and the inclusion of legalized marijuana in statistics for the first time.

"But the biggest factor is that the economy faces big wind winds from lower oil prices and weak home sales," Brown wrote in a report.

"Both suggest that the investment could fall further in the coming quarters, which will give the Bank of Canada a pause to think, and that the rate hike in January looks less likely than a month ago."

In the third quarter, investment in non-residential investment in buildings and civil engineering works declined by 1.3 percent, as investment in the oil and gas sector slowed. Investments in businesses and machinery fell by 2.5 percent.

Growth in household spending slowed down to 0.3 percent in the fourth quarter, compared with 0.6 percent in the second quarter. The decrease was due to the decrease in expenditures on durable goods by 0.7%, while the purchase costs of vehicles decreased by 1.6%.
Housing investment also fell 1.5%, as housebuilding expenses dropped by 4.7%, the largest decline since the second quarter of 2009. Renovation of expenditures dropped by two percent, while the cost of ownership transfer increased by 7 , 1%.

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