The Canadian economy has shown signs of stagnation in the recent quarter, potentially entering a technical recession due to previous aggressive rate increases by the Bank of Canada. Preliminary estimates suggest that the economy stalled at the industry level in September, marking a potential annual contraction of around 0.1%. This would be the second consecutive quarterly decline in Gross Domestic Product (GDP), falling short of the central bank’s forecast.
The GDP by industry displayed minimal change from the previous month, with real GDP essentially unchanged in September. The Bank of Canada predicts weak economic growth for the next year, after averaging 1% over the past year. Although expenditure data might indicate slight growth for the third quarter and help avoid recession, it is still significantly below the central bank’s estimates for total GDP growth.
Consumer and business surveys indicate tightening spending habits and a reduction in hiring and investment plans. The pace of industry-level activity in August was weaker than expected, with goods-producing industries slightly contracting and services industries’ production marginally increasing. Mining and energy extraction made a robust advance, but manufacturing continued to contract for the third consecutive month. Out of the 20 industry sectors tracked, eight experienced growth in August.
The Bank of Canada recently maintained its policy interest rate at a 22-year peak of 5%, with policymakers cautioning about slow easing in inflation. Economists propose that this stagnation might signal the end of interest rate hikes by the central bank, with potential cuts as earlier rate increases continue to affect inflation.
Bank of Montreal anticipates an acceleration in recession discussions due to potential back-to-back negative quarterly GDP readings. Meanwhile, CIBC Capital Markets foresees the first rate cut by the Bank of Canada in the second quarter of next year.
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