2023-09-01 12:45:29
Gross domestic product (GDP) fell by 0.2% in the second quarter, a surprising decline that indicates that the Canadian economy is beginning to bend its knees due to inflation and high interest rates.
The fall in GDP is much greater than that forecast by the Bank of Canada, at 1.5%, and most economists, who were betting on growth around 1%. Statistics Canada also revised down the growth of the Canadian economy in the first quarter, from 3.1% to 2.6%.
This economic health report comes a few days before the Bank of Canada’s next decision on the key interest rate, which will take place on Wednesday. The figures should encourage the monetary authorities to keep the rate at its current level of 5%.
The drop in GDP in the second quarter comes on top of the weakness of other indicators published recently, such as the drop in retail sales and the increase in the unemployment rate.
For Desjardins economist Randall Bartlett, the Bank of Canada’s game plan is now clear. “Today’s data reinforces our view that the Bank of Canada is done with hikes for this cycle and its next move should be a cut, possibly as early as the first quarter of 2024,” he said.
This is also the opinion of many of his colleagues. “The rate hikes are over,” analyzes Doug Porter, chief economist of the Bank of Montreal. Now the Bank of Canada just has to be patient and wait for inflation to come down, but that might take a while, especially with the price of oil going up. »
According to Statistics Canada, the slowdown in the economy in the second quarter was due to continued declines in housing investment, lower inventory accumulation, and slowing international exports and household spending.
The increase in household spending, at 0.1%, is a marked slowdown compared to the previous quarter, when the increase had been 1.2%. “Even though overall household spending increased slightly in the second quarter, household spending per capita fell 0.7%,” said Statistics Canada.
Household spending per capita has fallen in three of the past four quarters. Canadian households notably bought fewer new cars and less furniture in the second quarter.
Businesses are also beginning to suffer. In the second quarter, the income of non-financial corporations posted a fourth consecutive quarterly decline, according to Statistics Canada.
Towards a recession
According to preliminary estimates from Statistics Canada, the third quarter which began in July is also looking bad, with GDP neither rising nor falling during the month. “We continue to expect economic lethargy over the next 12 months,” said National Bank economists Matthieu Arseneau and Alexandra Ducharme in their analysis of the latest statistics.
Other economists believe that a recession cannot be avoided. Those of Desjardins predict another contraction of the economy in the third quarter, which corresponds to the definition of a recession, or at least two consecutive quarters of decline in GDP.
“The Canadian economy is on the verge of a slight recession,” also believes Laurentian Bank’s chief economist, Sébastien Lavoie.
The good news is that the economic slowdown should help the Bank of Canada in its fight once morest inflation. Despite progress on this front, the Consumer Price Index rose in July, to 3.3%, and core inflation measures monitored by monetary authorities remain elevated.
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