Indications of a potential technical recession are surfacing within Canada’s economy, suggesting that high interest rates are exerting a heavy burden on consumer spending. According to provisional figures from Statistics Canada, the country’s economy exhibited no significant growth during August. Furthermore, initial estimates predict a slight contraction in the economy for the third quarter.
This below-par data is strengthening predictions that the Bank of Canada has concluded its cycle of interest rate increases, triggering discussions and fears of a possible recession. Andrew Grantham, CIBC’s executive director of economics, believes that the likelihood of further hikes in interest rates is slim due to the current languid performance of the nation’s economy.
Canadian growth remained stagnant for a second successive month during August, and early indicators propose a continuation of this trend throughout September. Regarding the third quarter, Statistics Canada’s preliminary estimate alludes to a minute annualized contraction in the economy of 0.1 per cent, which would ensue after a similar contraction in the second quarter.
Generally speaking, a recession is characterized by two consecutive quarters of negative growth. However, economists also consider widespread weakness as a prerequisite for classifying a downturn as a recession. Despite this setback, Nathan Janzen, assistant chief economist at RBC, maintains that the observed declines are marginal.
Moreover, Grantham insists that it is evident that Canada is closely evading a recession but cautions against reading too much into preliminary figures, as they are liable to upward revisions upon the release of final data.
Grantham expressed concerns that the Canadian economy is stalling, exacerbated by the jitters around the aftermath of past interest rate hikes. Additionally, he expects sluggish job growth that trails population growth. Furthermore, he noted a shift in employment quality, with higher-paying industries letting people go, while lower-paying sectors continue to hire.
In total, eight out of 20 industries showed growth in August. However, the advancements made by services-producing sectors were counterbalanced by the decline in goods-producing sectors. Factors such as high interest rates, rising inflation, forest fires and drought conditions continue to place undue pressure on the economy.
The report further highlights how high interest rates are decelerating economic growth. Despite a rapidly growing population, consumer-sensitive sectors such as retail are suffering.
Meanwhile, sectors like agriculture and forestry, manufacturing, retail, and accommodation and food services are dwindling. In contrast, industries such as wholesale trade and mining, quarrying, oil and gas extraction are expanding.
The Bank of Canada chose to maintain its key interest rate at five per cent in its previous two decision meetings. Janzen contends that these choices will be vindicated by Tuesday’s data release.
Forecasts from the Bank of Canada suggest that economic growth will remain weak for the rest of the year and through 2024. High interest rates are projected to continue retarding growth in the economy, more so as households renew their mortgages at the elevated rates.
The Bank of Canada expects annual inflation to revert to the two per cent target in 2025, given the curtailing effects of higher borrowing costs on high inflation which stood at 3.8 per cent in September.
