Canadian Economy Dips: Housing Investments, Construction Sector Struggle Amid Interest Rate Hikes

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Canada’s economy showed signs of sluggishness in the second quarter due to declining housing investment, primarily in new construction. Statistic Canada reported a contraction rate of 0.2 per cent annualized over the period.

The growth reading for the first quarter was also somewhat underwhelming, revised down to an annual pace of 2.6 per cent from the earlier 3.1 per cent forecast. The downturn in the second quarter was largely a result of a 2.1 per cent decrease in housing investment, marking its fifth sequential quarterly drop. New construction took a significant 8.2 per cent dip, while renovation expenditure too witnessed a decline of 4.3 per cent.

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An overall rise in Canadians’ borrowing costs, caused in part by the Bank of Canada’s interest rate increases, led to this decrease in spending. The central bank is striving to re-establish inflation to its target of two per cent.

Several other economic indicators also displayed a sluggish trend. Lower rates of inventory accumulation, moderating growth in exports and household spending were among the significant contributors to the economic slowdown. While exports grew marginally by 0.1 per cent in the second quarter comparing to a stronger 2.5 percent increase in the first quarter, the growth in real household spending slowed to 0.1 per cent from 1.2 per cent.

Pedro Antunes, the chief economist at the Conference Board of Canada, acknowledged a surprise at the sluggish economic performance, given that the Bank of Canada had estimated a 1.5 per cent annualized GDP growth, and analysts had forecast a 1.2 per cent growth. He opined that the central bank’s stricter monetary policy was inducing a decisive slowdown in consumer expenditure, a condition favorable in his view, and advocated holding off on any further rate hikes.

The construction sector, particularly retail and wholesale industries, was the most affected, a factor Antunes found to be unsurprising given the steep interest rate hikes. Colin Snaith, a senior manager with SG Constructors, noted the construction sector’s struggles with the resultant impact of higher interest rates, particularly in the high-rise construction segment.

Things looked positive in the non-residential sector though, with business investment increasing 2.4 per cent in the second quarter owing to a 3.3 per cent rise in spending on engineering facilities. However, as the economy saw an overall contraction by 0.2 per cent in June, both the services-producing and goods-producing industries witnessed a dip.

Statistics Canada hinted that real GDP for July would remain steady, however reaffirmed that the figure could be revised. The upcoming Bank of Canada’s interest rate decision next week is much anticipated, particularly considering the bank had raised its key interest-rate target by a quarter-percentage point to five per cent in July over concerns of a possible inertia in its progress toward the two per cent inflation target.