Canada’s economy has unexpectedly contracted in the second quarter of this year, according to a report by Statistics Canada. This surprising downturn has led many economists to question whether the Bank of Canada will continue its aggressive series of interest rate hikes, which it has implemented in an effort to combat rising inflation.
During the second quarter, Canada’s Gross Domestic Product (GDP) contracted at an annualized rate of 0.2 percent.
This contraction was driven by a decline in housing investment, particularly in new construction, which saw an 8.2 percent drop in the quarter. Renovation spending also fell by 4.3 percent. Housing investment has now decreased for five consecutive quarters, partly due to higher borrowing costs resulting from the Bank of Canada’s interest rate hikes.
The weakness in Q2 was not limited to the housing sector; it also extended to lower inventory accumulations, slower export growth, and reduced household spending.
Exports of goods and services only increased by 0.1 percent in the second quarter, compared to a 2.5 percent rise in the first quarter. Likewise, growth in real household spending slowed to 0.1 percent in Q2, down from 1.2 percent in the previous quarter.
Pedro Antunes, chief economist at the Conference Board of Canada, expressed surprise at the economic stall and suggested that further rate hikes should be postponed.
The Bank of Canada had expected an annualized GDP growth of 1.5 percent, while analysts had forecast a 1.2 percent gain. Antunes argued that the central bank’s tightened monetary policy seemed to be curbing consumer spending.
The retail and wholesale sectors, catering to households and offices, were among the hardest hit by this economic downturn.
According to experts, the slowdown in construction was somewhat expected, especially given the drastic increase in interest rates.
Colin Snaith, a senior manager with SG Constructors, explained that many construction projects had been delayed due to the impact of higher interest rates.
Snaith said, “We’ve definitely seen a reduction in the number of homes being built, particularly in the high-rise sector.” He added that although the construction industry remained relatively busy due to pre-existing projects, start dates for new ones were pushed back, and the pre-construction period extended. The uncertainty surrounding interest rates also affected condo and home sales.
On a more positive note, business investment in non-residential structures increased by 2.4 percent in the second quarter, driven by a 3.3 percent gain in spending on engineering structures.
Despite this setback, the Bank of Canada remains committed to its goal of achieving a two percent inflation target. The central bank had raised its key interest rate target by a quarter of a percentage point to five percent in July, citing concerns about inflation.
However, the recent economic contraction may prompt a reconsideration of further interest rate hikes.
The latest economic report precedes the Bank of Canada’s upcoming interest rate decision, scheduled for September 6th. Economists and financial analysts will be closely watching to see how the central bank responds to this unexpected contraction and whether it will continue its aggressive stance on interest rates in the face of economic challenges.
