Canada’s economy loses momentum as rate hikes take hold

The Canadian economy is decelerating rapidly. bank of canada Raise interest rates to curb excessive inflation that portends a potential recession this year.

Real gross domestic product rose 0.1% in November, according to figures released by Statistics Canada on Tuesday. Overall, the economy grew at an annual rate of 1.6% he in the fourth quarter. This estimate he expects to be updated near the end of February.

Despite the slowdown, the economy has shown resilience amid mounting headwinds. Growth in the final months of 2022 was stronger than predicted by the Bank of Canada and several financial analysts. In particular, employers continued to hire workers in large numbers, keeping the unemployment rate near an all-time low.

Separately, the International Monetary Fund released a hopeful message on Tuesday predicting the global economy to grow by 2.9% in 2023. This is an upward revision from our previous estimate of 2.7%. The IMF said its outlook was “less pessimistic” than he was in October, adding that China’s reopening from its strict COVID-19 measures and U.S. and European demand “surprisingly resilient.” There is. The IMF said global economic growth would accelerate next year.

Meanwhile, countries such as Canada are losing momentum. The Canadian economy grew at an annualized rate of 3.2% in the second quarter and 2.9% in the third quarter before falling to an estimated 1.6% in the last three months of 2022. This downward trend should continue.

The Bank of Canada expects the economy to stall in the first half of 2023. It doesn’t rule out a mild recession, an outcome many Bay Street analysts are expecting.

“Just as you can have slightly positive growth, you can have negative growth of two-fourths or even three,” Bank of Canada’s Tiff Mackrem said at a press conference last week. “Yes, it could be a mild recession. It’s not a big contraction.”

In November, 14 of the 20 industry sectors registered growth. Shipping and warehousing rose 1% in the month, boosted by his 4.6% surge in air shipments. The financial and insurance sector rose 0.5% after falling three months in a row. The public sector he expanded by 0.3%.

At the same time, we have seen contractions in interest rate sensitive industries. Construction fell 0.7% in November as residential buildings and repairs weakened.

Retailers did poorly in November as the industry fell 0.6%. Food, building materials, and miscellaneous goods stores were particularly hard hit.

Restaurants and bars also had a tough month, contracting 2.9%.

“The Canadian economy has not cooled as quickly as previously expected given the rapid rise in interest rates, but there are growing signs of vulnerabilities,” said Andrew Grantham, senior economist at CIBC Capital Markets. ‘ said. client.

“The recovery in many services has slowed even though activity is well below pre-pandemic levels, and the decline in restaurant activity has prompted consumers to change their behavior in the face of inflationary pressures and rising interest rates. It could be an early sign of something.”

The Bank of Canada raised its benchmark interest rate to 4.5% from a pandemic low of 0.25% in March 2022, the fastest rate hike in a generation. Central banks are deliberately slowing the economy to bring in supply. We will improve the balance of demand to contain the rapid rise in consumer prices.

There have been recent advances on that front. Annual inflation slowed to 6.3% in December from a nearly 40-year high of 8.1% in June. The central bank’s target is 2%.

“Inflation of 6% is still too high. Canadians are still struggling with the steep rise in the cost of living,” Mr Mackrem said last week. “Economic development has strengthened our confidence [that] Inflation has subsided. But it will take a while to get there, and the economy will soften. “

Following last week’s rate hike, the Bank of Canada has tentatively kept its benchmark rate unchanged at 4.5% and is assessing whether its policy is restrictive enough to bring inflation back on target. It may take months or even longer for the full effect of higher interest rates to be felt. The bank warned it would raise interest rates again if necessary.

Growth may slow at the start of the year, but the Bank of Canada forecasts 1% real GDP expansion in 2023.

Reuters reports