Canadian Economy Sputters Into Lower Gear as Rising Interest Rates Bite

Gross domestic product was flat in August, preliminary data from Statistics Canada show, after gaining just 0.1% in July and June. Since April, growth has averaged just 0.1% on a monthly basis.

In a separate report, the agency said job vacancies also declined by 56,400, or 5.5%, in July. Total vacancies, however, remain elevated at just under 1 million.

Market reaction was muted. The Canadian dollar dipped about 0.1% to C$1.37 per US dollar as of 9:06 am in Toronto. Yields on two-year bonds were little changed at 3.8%.

The data are consistent with an economy gearing down from a strong start to the year, as a reopening boom loses steam.

“After a solid first half of the year, momentum appears to be slowing as multi-decade high inflation and rapidly rising interest rates weigh on the economy,” Benjamin Reitzes, a rates strategist with Bank of Montreal at Bank of Montreal, said in a report to investors.

The weakness shows the extent to which Canada’s resource-heavy economy — which had benefitted from the recent boom in energy prices — remains vulnerable to global economic headwinds and higher borrowing costs that threaten to stall expansions in most major advanced economies.

While the slowdown won’t be enough to stop the Bank of Canada from delivering another interest rate hike next month, policymakers will be closely monitoring the extent of softness in the economy to see how high they need to go to rein in inflation to the 2% target.

Governor Tiff Macklem has already increased the Bank of Canada’s policy rate by 3 percentage points since March, and is expected to continue hiking through the rest of this year. Markets are pricing in a 50 basis-point increase at the next decision on Oct. 26.

The Canadian economy grew 3.1% in the first quarter and 3.3% in the following three months. Economists anticipate Canada’s growth rate will fall to 1% annualized in both the third and fourth quarters of this year.

In July, the manufacturing and construction sectors contracted, wholesale trade pulled back, retail activity shrank, and higher inflation and interest rates continued to slow real estate activities.