Slight decline in the Canadian economy in the second quarter

2023-09-01 21:47:27

Economists say the Bank of Canada’s rate hike campaign may be winding down due to new gross domestic product (GDP) data, released by Statistics Canada on Friday, which show the economy contracting in the second quarter.

The Canadian economy appeared to stagnate in the second quarter, as housing investment continued to decline (-2.1%), led by the slowdown in new construction (-8.2%). The economy contracted at an annualized rate of 0.2% from April to June, Statistics Canada said, which was weaker than experts had expected.

The drop in spending came as Canadians grappled with higher borrowing costs, fueled by interest rate hikes from the Bank of Canada, which is trying to bring inflation back to its 2% target. .

Tu Nguyen, an economist at accounting and advisory firm RSM Canada, points out that the slowing economy should be enough evidence for the central bank to back off on further rate hikes, unless another major external shock hits. not drive up inflation.

“His goal is not to cause a recession. So it seems that the bank has achieved its goal [de réduire une économie en surchauffe] “, she argues.

M^me Nguyen observes that this is the first time since the early days of the pandemic that spending on services has not increased, which she says is a strong signal of a slowing economy. This, despite the increase in household savings, which “choose not to spend this money because they anticipate a recession”.

No imminent rate cut

The Bank of Canada’s next interest rate decision is scheduled for next Wednesday.

The central bank raised its key interest rate to 5% in July, expressing concern that progress towards the 2% target could stagnate.

M^me Nguyen predicts the Bank of Canada is unlikely to cut rates until at least April 2024.

“If the bank cuts rates too soon, it encourages businesses and households to borrow again, which kind of heats up the economy, and we really need a cooling period. »

Statistics Canada has also revised its growth figures for the first quarter, and it is now reporting annualized growth of 2.6%, rather than 3.1%.

“The surprise contraction in GDP in the second quarter leaves no doubt that the Bank of Canada will keep interest rates unchanged next week,” writes Stephen Brown, deputy chief economist for North America at Capital Economics. , in a note addressed to its customers.

“With the fall in monthly GDP in June and the apparent stagnation in July, which pose a fragile foundation for the third quarter, the Canadian economy could already be engaged in a modest recession,” he analyzes.