The economy continues to slow in Canada, but hasn’t started to pull back, according to the latest news.
The impact of inflation and rising interest rates on construction and retailer and restaurant sales was not enough to reduce Canada’s gross domestic product (GDP) over the past two final months of 2022, Statistics Canada reported Tuesday. In November, real GDP growth was just 0.1%, while preliminary data for December indicate that the size of the economy remained “essentially unchanged”.
This would mean that the Canadian economy was posting an annualized growth rate of 1.6% in the fourth and final quarter. This would be half the average of the previous three quarters (3%), but a little better than what the Bank of Canada still expected last week in its most recent economic forecasts (1.3%), and proof of a certain resilience of an economy that some experts, last fall, saw in recession before the end of 2022.
In fact, 14 of the 20 major activity sectors analyzed posted an increase in November. Public administration (+0.5%) and public services (+0.7%), such as electricity, telecommunications or transportation, are among those that contributed the most to the growth of the economy.
Some sectors hard hit during the COVID-19 pandemic also continued to recover. This is the case, among others, for air transport (+4.6%), which has benefited for several months from the lifting of border restrictions linked to the pandemic, and accommodation (+2.5%), which has also seen an increase in the number of travellers, notes Statistics Canada. But this is also the case for the large arts and entertainment sector (+0.6%).
The shock of prices and interest rates
Conversely, residential construction (-1.8%) suffered a seventh decline in eight months in November. This is its biggest drop since last May.
The situation was no easier in retail trade (-0.6%), where 8 of the 12 sub-sectors were down. This was particularly difficult in grocery stores (-1.8%), which fell to their lowest level since April 2018, even taking into account factors related to the time of year when the measures were taken.
The slowdown in economic activity is not surprising given the sharp increase in the cost of living, which has weighed on consumers’ purchasing power, and the accelerated rise in interest rates by the Bank of Canada in recent month, which aims to break the momentum of this inflation, observed Monday the economist at the Royal Bank Nathan Janzen in a brief analysis. This loss of economic vigor is not over because it generally takes 18 to 24 months before an increase in interest rates produces its full effect.
The fact that the Canadian economy is still holding up reasonably well will reinforce the Canadian central bank’s desire to keep interest rates unchanged for some time, said James Orlando of TD Bank.
“In an environment of extremely tight monetary policy, we continue to expect near-stagnation [économique] most of 2023,” say Matthieu Arseneau and Alexandra Ducharme of National Bank.
There is still strong reason to fear that economic growth “will enter negative territory during the first half of the year”, predicts Nathan Janzen.
Flirting with recession
Last week, the Bank of Canada spoke of an economy that would decline from an average growth of 3.6% last year to just 1% this year and 1.8% in 2024, due to a ” stagnation until around the middle of 2023″. Its governor, Tiff Macklem, has not ruled out a recession, “but then, a very modest recession”.
The International Monetary Fund was a bit more optimistic in its own economic forecast update released on Monday. It predicts annual growth of 1.5% in Canada this year as well as next year, which would still be better than in the United States (+1.4% and +1%), than in the euro zone. (+0.7% and +1.6%) and in the United Kingdom (-0.6% and +0.9%).
In October, the institution believed that with central bank interest rates rising, China struggling and the repercussions of the war in Ukraine, countries representing one-third of the global economy would soon go through at least two consecutive negative quarters. But the global economy is showing “stronger than expected resilience”, she explained on Monday, thanks to the strength of the labor market, the good performance of household consumption and business investment. and a stronger than expected adaptation to the energy crisis in Europe.
However, China (+5.2% and +4.5%) and India (+6.1% and +6.8%) alone should account for half of global growth this year ( +2.9%), “ once morest only a tenth for the United States and the euro zone combined”.
