2023-10-31 22:41:32
Industries that have seen growth include wholesale trade and mining, quarrying, and oil and gas extraction. (Photo: The Canadian Press/Nathan Denette)
The Canadian economy may have entered a technical recession, according to Statistics Canada’s preliminary estimate of gross domestic product (GDP).
In its GDP report released Tuesday, the federal agency revealed that the Canadian economy remained stable during the month of August, while its preliminary estimate for the entire third quarter suggested a contraction in activity economic.
The report noted that rising interest rates, inflation, wildfires and drought had continued to weigh on the economy.
These data, weaker than expected, reinforce the idea, shared by several observers, that the Bank of Canada is finished raising interest rates.
“I don’t think they will raise interest rates again, given the weakness of the economy,” said Andrew Grantham, managing director of economic affairs at CIBC.
August was the second consecutive month where growth remained stable, and preliminary data suggests the economy continued this trend in September.
For the third quarter, Statistics Canada’s preliminary estimate suggested that the economy contracted at an annualized rate of 0.1%. The economy also contracted in the second quarter.
A technical recession is defined as two consecutive quarters of negative growth, but economists are generally on the lookout for broader weakness to classify a downturn as a recession.
“The declines are still very small,” observed Nathan Janzen, deputy chief economist at Royal Bank of Canada.
According to Andrew Grantham, it is clear that Canada is flirting with a recession.
“The economy is very weak, we’re stagnant at a time when we haven’t really felt the biggest impact of some of the past interest rate hikes,” he stressed.
In addition, he warned against interpreting preliminary data from Statistics Canada, since they will necessarily be revised before their official publication, in a month.
Less widespread layoffs
A recession is often associated with layoffs and rising unemployment rates as business conditions deteriorate. Andrew Grantham said CIBC expected employment growth to be slow and lower than population growth. However, so far, layoffs have been uneven across sectors, he noted.
“What makes this situation different from more typical recessions is that we are seeing layoffs in some sectors, but there are still other sectors of the economy that are trying to rehire and return to full capacity, because they couldn’t do that after the pandemic due to labor shortages,” he explained.
“So what we’re seeing more than significant layoffs and an increase in the unemployment rate is that perhaps the quality of employment is changing. Maybe some of the higher-paying industries are laying people off, but there are lower-paying sectors that are still trying to hire, so that protects us to some extent.”
The report said that 8 out of 20 industries recorded growth in August, and that the increase in service-producing industries was offset by the decline in goods-producing industries.
According to Statistics Canada, rising interest rates, inflation, wildfires and drought continued to weigh on the economy.
Andrew Grantham says the effect of natural disasters and weather events on growth is a reminder that climate change can fuel inflation through supply disruptions.
“It’s a supply constraint; it slows down economic activity. But at the same time, it is not necessarily a restriction of economic activity that helps control inflation. In fact, quite the opposite. This tends to increase inflation,” said Andrew Grantham.
Details of the GDP report offer new evidence that interest rates are helping to slow the economy, as consumer-sensitive sectors such as retail take a hit, even as the population is increasing rapidly.
“The fact that activity in these sectors is slowing, despite population growth, is further evidence that rising interest rates are starting to have a more significant impact on household spending behavior per person,” he said. clarified Nathan Janzen.
Sectors such as agriculture, forestry, fishing and hunting, manufacturing, retail trade and accommodation and food services recorded declines.
Sectors that experienced growth included wholesale trade and mining, quarrying, and oil and natural gas extraction.
No new rate hike in sight
The Bank of Canada chose to maintain its key interest rate at 5% during its last two monetary policy meetings. Nathan Janzen said Tuesday’s data solidified that decision.
“This makes a further rise in interest rates less likely,” he said.
High interest rates are expected to continue to dampen economic growth, particularly as more households renew their mortgages at higher rates.
According to a recent forecast from the Bank of Canada, economic growth will remain weak for the rest of the year and part of 2024.
The decline in spending caused by rising borrowing costs is expected to help curb high inflation, which stood at 3.8% in September.
The Bank of Canada expects annual inflation to return to the 2.0% target in 2025.
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