September 7, 2023
Economists say the latest GDP data from Statistics Canada showing a contraction in the economy suggests the Bank of Canada’s rate hiking campaign may be coming to an end.
The Canadian economy appeared to stall in the second quarter as investment in housing continued to fall, led by drop in new construction. The economy contracted at an annualized rate of 0.2 per cent in the second quarter, Statistics Canada reported, far weaker than forecasters had expected.
The decline in the second quarter came as housing investment fell 2.1 per cent to post its fifth consecutive quarterly decrease. New construction dropped 8.2 per cent in the quarter, while renovation spending fell 4.3 per cent. The drop in spending came as Canadians face higher borrowing costs fuelled by interest rate hikes by the Bank of Canada, which is trying to bring inflation back to its target of two per cent.
Tu Nguyen, an economist with accounting and consultancy firm RSM Canada, said the cooling economy should be enough evidence for the central bank to forgo further rate hikes unless there is another major external shock that sends inflation upward.
“The bank’s goal is eventually to restore price stability, to taper an overheated economy. Their goal is not to incur a recession. So it looks like the bank is achieving their goal,” she said. “They’re certainly going to continue monitoring the data because there has been quite a lot of noise. The reason why I’m fairly confident that this is the end of it is we don’t expect spending to really go up towards the end of the year.”
The Bank of Canada’s next interest rate decision is set for next week. The central bank raised its key interest rate by a quarter of a percentage point to five per cent in July as it said it remained concerned that progress toward its two per cent inflation target could stall.
Nguyen predicted the Bank of Canada likely won’t cut rates until at least April 2024. “The bank needs to see sustained evidence of inflation going at least towards two per cent. It probably won’t get to two per cent until 2025 but it needs to stay below three per cent for long enough,” she said.
“If the bank cuts rates too early, it’s encouraging businesses and households to go out and borrow again, sort of heating up the economy again, and we really need a period of cooling down.”
