Economy in Brief

Canadian growth has been in its own trajectory with some solid consumer spending in gear and some slight slowing in GDP growth. Housing has begun to show some wear and tear in this environment even as mortgage rates have remained well off peak and have begun to stabilize around the 5% mark for 5-year mortgage financing.

Canada has been cutting its policy target rate faster than the Fed has been reducing the Fed funds rate. Canada’s unemployment rate has hovered above the rate for the US and it has been rising; rising - not quickly - but with a bit more purpose than in the US. This may have encouraged the Bank of Canada to cut rates more aggressively with inflation fluctuating is the desired range set by the back of Canada.

Canadian housing starts show the ‘signature slowing’ during Covid and the strong post-Covid recovery that actually has boosts starts well above the average it had maintained for the five-year previous to Covid. Even not with new episode of weakness in train Housing starts are above the pre-Covid average in Canada- and facing higher financing rates than before.

Canada, like the US, is going through some difficult fiscal times. In addition, there is an ongoing Trump-Carney spat that is a heavy overlay on the bilateral relations so important to both economies. Canadian PM Mark Carney just survived a confidence vote over his budget. The Carney budget aims to pump funds into the Canadian provinces to boost infrastructure and house-building. In Canada builders also face development fees that some want altered but the offer of reducing them has not been put on the table. Not surprisingly Canada is under some of the same pressure as the US for the government to act and supply answers for the housing shortage that has emerged. Carney’s platform on which he was elected had made some substantial promises and they still are not coming to fruition.

Covid seems to have upset a number of apple carts many of them related to housing. Prior to Covid housing demand had not been so vigorous. But Covid may have triggered something that reminded people how important housing can be especially in a crisis when you become house-bound. In the wake of Covid US and Canadian housing demand strengthened. And since the bank of Canada made the same policy mistake as the Fed driving interest rates to the brink of the zero bound during Covid it also created a period of super low mortgage rates which now has the effect of trapping people in their own homes- a form of "golden-handcuffs" that keep people in a house because of cheap financing. While mortgage rates are nearly 150bp below their post Covid peaks, they are still more than 100bps above their pre-Covid averages. The housing market remains under duress.

Inflation around the world appears to be rather similarly behaved Canada is a very close trading partner of the United States and so we might expect that there would be a little more connection between the prices in Canada and in the US and possibly we can learn something about the upcoming US CPI report by looking at the just-released Canadian CPI report.

Canadian inflation is highly correlated with inflation in the US. The US and Canadian CPI's have a correlation of 0.97 on annual percentage changes. Canada's CPIx measure has a correlation with the US headline CPI of 0.94 and the Canadian core inflation rate has the correlation with US core inflation rate of 0.94. All of these measured against year over year inflation. Clearly with a good deal of trade and a long common border prices in the US and Canada have a chance to mix it up and affect one another and create some degree of homogeneity. However, none of that is really perfect. Despite the strong correlation between headline inflation and core inflation between the US and Canada, Canada's core CPI and the US core CPI have a correlation based on month-to-month changes of less than 0.2 Using an R-squared metric.

Well, it might be somewhat comforting to look at Canadian inflation, and I think it's giving some guidance for the US. That would only be true over a long period of time, but it probably doesn't provide much guidance for us in terms of what we can expect from the month-to-month changes.

While Canada's correlation with US inflation is high it's correlation with inflation in Japan it's only 0.33: only 1/3 of the variants in these two indicators is in common. In terms of the Euro-Area the correlation is less than -0.1, which tells us the correlation is negative and extremely small and of course not statistically significant.

The Canadian CPIx measure shows inflation pretty flat at around 2.6% over 3 months and over 12 months. Canada's 6-mo CPI measure accelerates from 2.2% over 12-months to a 2.6% annual rate over 6-months to a 3% pace over three months. US inflation on these horizons essentially replicates what's presented by Canada's CPI X based on existing data. However, the R-squared association between the three month annualized percent change in the Canadian CPI versus the US CPI shows that they share about half of the same variation with an R-squared of about 0.5. And on this comparison Canada’s and US’ recent inflation trends appear to be highly similar.

The Bank of Canada looks at inflation using several different metrics and it also looks at inflation relative to a range unlike the US, leading to a much more measured discussion of what inflation is and how it's performing.

The decision by the Fed in the US to stick with a simple point forecast at this point is something that probably cannot be changed, at least not until the central bank is able to show that it can hit that target consistently. Even so, the Fed has not showed a great appetite for trying to express inflation in terms of a target band. However, when the Fed changed its framework agreement it did adopt something called flexible average inflation targeting (FAIT) which never really described for us or explained what it was and it has a set that approach aside I think to the pleasure of most economists.

There continues to be buzzing and differences of opinion over what the inflation target should be in the US. However, the international standard has been set at 2 per cent and at this point adopting a number different than that doesn't seem to make a lot of sense. Adopting 2% with some flexibility might make some sense but, of course, the Fed is already doing that as it's allowed a 4 1/2-year overshoot of its inflation target as it continues to cut rates. This decision, however, does not amount to a change in the Fed’s inflation targeting but rather to a set of decisions that appears to be losing the Federal Reserve credibility. Meanwhile, the Bank of Canada, operating with the range and having had much the same kind of access that the Fed has had in hitting and missing its inflation target midpoint, has emerged from this period with its credibility largely intact.

The European Monetary Union released an uneventful GDP report with GDP rising by 0.2% quarter-to-quarter in 2025 Q3 compared to an increase of 0.1% quarter-to-quarter in the second quarter of 2015.

At an annual rate, overall GDP rises at a 0.9% pace in the third quarter, up from 0.5% in the second quarter; that acceleration masks a deceleration in the year-over-year growth as Q3 growth is at 1.4% year-over-year compared to an increase of 1.5% year-over-year in the second quarter.

The table shows eight early-reporting monetary union members and among these eight only two of them show GDP slowing in the third quarter compared to the second quarter on quarter-to-quarter changes. Ireland slows to -0.4% after gaining by 0.9% in the second quarter. Spain’s annual rate in the third quarter falls to 2.6% compared to a 3% pace in the second quarter.

Looking at year-over-year growth rates, there are decelerations that are much more common. In fact, there are accelerations in only three of the countries: Belgium, France, and Portugal. Belgium’s GDP growth in the third quarter moves up to 1.1% from 1% in the second quarter, growth in France is at 0.9% in the third quarter compared to 0.7% in the second, while Portugal logs an increase of 2.4% compared to 1.8% year-over-year gain in the second quarter.

Looking at growth in terms of the four largest EMU economies versus the rest, large economy growth notched 0.9% in the third quarter in terms of quarter-to-quarter changes compared to 0.4% in the second quarter. Euro area growth for the large economies was unchanged 0.8% in the third quarter; in fact, it has grown by 0.8% year-over-year in the first quarter, second quarter, and third quarter of 2025. The rest of the monetary union shows growth accelerating in the third quarter to 1.1% from 0.7% in the second quarter. However, the year-over-year growth rate for the rest of the monetary union drops down to 2.8% in the third quarter from 3.4% in the second quarter and that compares to 3.8% in the first quarter.

The median growth rate, which is the growth rate among these eight countries and is unweighted, rises to 1.4% in the third quarter from 1% in the second quarter while the year-over-year growth rate has a median of 1.1% compared to 1.3% in the second quarter.

The quarter-to-quarter growth rates favor slightly the smaller countries in terms of the growth rate being logged although both large and small countries show a stepup in growth from the second quarter to the third quarter. Year-over-year growth rates also show much stronger growth in the rest of the monetary union compared to the four largest EMU economies on a consistent basis in fact for each of the four quarterly year-over-year growth rates in the table.

The rankings of growth give us some idea why we face these statistics, since three of the four largest monetary union economies log growth rates that are below their respective median growth rates since the late 1990s. Only three countries have growth rates above their medians on this timeline; those are Ireland, Portugal, and Spain. Germany, the largest monetary union economy, has a 30.4 percentile ranking for its year-on-year growth rate, France has a 28.3 percentile ranking, and Italy has a 35.9 percentile ranking.

The numbers posted today are in line with preliminary results and what markets had expected. Growth in the euro area continues to be positive and to move ahead. The signs in this report are that there's more progress than regress quarter-to-quarter although the progress remains slow, it's also relatively broad. This is a positive report but not a glowing report.