Canada’s economy loses momentum as rate hikes take hold

Canada’s economy loses momentum as rate hikes take hold

The Canadian economy is slowing quickly as the Bank of Canada hikes interest rates to tamp down excessive inflation, the prelude to a potential recession this year.

Real gross domestic product rose 0.1 per cent in November, according to figures published Tuesday by Statistics Canada, with a preliminary estimate showing little change in December. All told, the economy grew at an annualized rate of 1.6 per cent in the fourth quarter, based on that reading for December, which will be updated near the end of February.

The economy is showing resilience as it faces mounting headwinds and financial strain for many households. Growth in the fourth quarter was stronger than what the Bank of Canada and several financial analysts had predicted. During the final months of 2022, employers were continuing to hire workers in droves, which kept the unemployment rate near an all-time low.

There is, however, a clear loss of momentum. The economy grew at annualized rates of 3.2 per cent in the second quarter and 2.9 per cent in the third quarter.

The Bank of Canada expects the economy to stall during the first half of 2023. It has not ruled out a mild recession, an outcome that many analysts on Bay Street are predicting.

“It’s just as likely that we’ll have two or three quarters of slightly negative growth as slightly positive growth,” Bank of Canada Tiff Macklem said at a press conference last week. “So yes, it could be a mild recession. It’s not a major contraction.”

In November, 14 of 20 industrial sectors managed to post growth. Transportation and warehousing rose 1 per cent for the month, highlighted by a 4.6-per-cent surge for air transportation. The finance and insurance sector jumped by 0.5 per cent, following three consecutive monthly declines. The public sector expanded by 0.3 per cent.

At the same time, there was contraction in rate-sensitive industries. Construction fell 0.7 per cent in November as residential building and repairs hit a weak spot.

Retailers fared poorly in November as the industry dropped 0.6 per cent. The declines were particularly large at stores selling food, building materials and general merchandise.

Restaurants and bars had a rough month, posting a 2.9-per-cent contraction.

“There are lots of moving parts here, with some sectors retreating and other industries still bouncing back to something like normal,” Bank of Montreal chief economist Doug Porter said in a note to clients. “But the overriding message is that the economy is just managing to keep its head above water,” he added.

The Bank of Canada is raising interest rates at the fastest pace in a generation, which has taken the benchmark rate to 4.5 per cent from a pandemic low of 0.25 per cent in March, 2022. The central bank is intentionally trying to slow the economy and bring supply and demand into better balance to quell soaring rates of consumer price growth. The annual rate of inflation has eased to 6.3 per cent in December from nearly a four-decade high of 8.1 per cent in June.

At last week’s rate announcement, the Bank of Canada said it was holding its policy rate at 4.5 per cent to assess whether its policies were restrictive enough to knock inflation back to the bank’s 2-per-cent. It cautioned, however, that it would raise rates again if needed.