Canadian economy stalls in second quarter: StatCan

Economists suggest that the recent GDP data released by Statistics Canada, indicating a decline in the economy, implies that the Bank of Canada's efforts to raise interest rates may be concluding.

The Canadian economy seemed to come to a halt during the second quarter due to a decline in housing investment, specifically in the construction sector. According to Statistics Canada, the economy contracted by 0.2 percent on an annualized basis in Q2, which was significantly weaker than what experts had anticipated.

During the second quarter, there was a decrease in housing investment by 2.1%, marking its fifth consecutive quarterly decline. Additionally, new construction experienced an 8.2% drop, whereas spending on renovations fell by 4.3%.

Canadians are experiencing a decrease in their expenses due to the rise in borrowing expenses caused by the Bank of Canada's interest rate increases. The Bank's objective in implementing these hikes is to restore inflation levels to their desired two percent target.

According to Tu Nguyen, an economist at RSM Canada, the slowing economy provides sufficient proof for the central bank to abstain from raising interest rates any further, unless there is a significant external event that causes inflation to rise.

"The main objective of the bank is to ultimately bring back stability in prices in order to control an excessively hot economy. Their main aim is to prevent a recession. Therefore, it appears that the bank is successfully accomplishing its objective," she stated.

They will definitely keep a close eye on the data as there has been a significant amount of disturbance. The reason I'm quite convinced that this is the conclusion is that we anticipate spending to remain relatively low as we approach the end of the year.

According to Nguyen, for the first time since the onset of the pandemic, there has been no increase in spending on services. She emphasized that this indicates a noticeable decrease in the economy. Despite the fact that households are saving more, it implies that individuals have more disposable income. However, instead of spending it, they opt to save it due to concerns about an upcoming economic downturn.

The upcoming interest rate decision by the Bank of Canada is scheduled for the following week.

In July, the main bank increased its primary interest rate by 0.25% to reach a total of 5%. The reason for this action was due to the bank's continuous worry that there might be a halt in the progress towards achieving its goal of maintaining a 2% inflation rate.

Nguyen made a forecast that suggests the Bank of Canada is unlikely to reduce interest rates before April 2024.

According to her, the financial institution requires continuous proof of inflation, which should be moving towards a minimum of two percent. Although it might not reach two percent until 2025, it should remain below three percent for a significant period of time.

If the bank reduces interest rates prematurely, it will motivate businesses and households to once again seek loans, consequently reigniting economic activity. However, what is crucial at the moment is a phase of easing or slowing down the economy.

Additionally, Statistics Canada adjusted its measurement for expansion in the initial quarter to a yearly rate of 2.6 percent, decreased from 3.1 percent.

Stephen Brown, deputy chief economist for Capital Economics in North America, mentioned in a message to customers that the unexpected decrease in GDP during the second quarter makes it highly likely that the Bank of Canada will maintain the current interest rates during the upcoming week.

Given the decline in GDP during the month of June and the apparent lack of progress in July, which doesn't bode well for the beginning of the third quarter, it is possible that the Canadian economy has already entered a small-scale recession.

The decline in the second quarter was also linked to reduced stockpiling, as well as sluggish growth in overseas sales and consumer expenditure.

The second quarter saw a slight rise of 0.1% in the export of goods and services, which is significantly lower than the 2.5% growth experienced in the first quarter.

The increase in real household expenditure decelerated to 0.1% during the second quarter, in contrast to the 1.2% growth witnessed in the previous quarter.

In the meantime, there was an increase of 2.4 per cent in business investment in non-residential structures during the second quarter. This growth was primarily driven by a 3.3 per cent increase in expenditures on engineering structures.

The general decline in the second quarter occurred as the economy shrank by 0.2 per cent in June.

The growth of industries involved in providing services decreased by 0.2 percent in June, while industries engaged in producing goods experienced a decline of 0.4 percent during the same period.

According to Statistics Canada, initial calculations indicate that the real GDP for July remained virtually stable. However, it is important to note that this estimate is subject to updates in the future.