The picture of an economic slowdown is coming into focus as the Canadian economy contracted in the second quarter because of declining housing investments and household spending.
Gross domestic product fell by 0.2% in the second quarter, according to Statistics Canada.
Gross domestic product fell by 0.2% in the second quarter, according to data released by Statistics Canada on Friday. On a monthly basis, GDP fell by 0.2% in June after an increase of 0.2% in May.
This is exactly what the Bank of Canada’s restrictive monetary policy is intended to do: Cool the previously overheated economy.
Amid other ample evidence of a cooling economy, including falling job vacancies and moderating core inflation, the Bank of Canada will most likely pause rate hikes next week at its meeting.
In addition, unless there is another major external shock that sends prices upward, the central bank is most likely done hiking interest rates, which would make 5% the terminal rate.
The central bank’s job is to walk the fine line between over- and under-tightening, and this is the sweet spot that will allow price stability to return without incurring a recession.
Read more of RSM Canada’s insights on the economy and the middle market.
This is the first time since the early days of the pandemic in 2020 that spending on services did not grow—a powerful signal of a cooling economy.
The spending engine of the past two years, with people wanting to gather, travel and dine as pandemic restrictions were loosened, is finally losing steam as households feel the pain of high interest rates and inflation.
The housing market
No other sector is affected by a restrictive rate environment as much as the housing sector. New construction dropped by 8.2% in the second quarter as borrowing costs soared for both developers and prospective homebuyers.
Still, housing seemed to have bottomed out and showed signs of stabilizing as real estate activity picked up again.
At the same time, household savings increased with higher wages as workers benefited from strong labour demand, though that demand began to cool with a reduction in job vacancies. The increase in savings also allows households to absorb the effects of inflation and to prepare for an economic slowdown.
On a monthly basis, wildfires and drought in June affected multiple sectors from agriculture to mining to oil and gas. Data in July and August will show the same pattern as wildfires raged through Yellowknife, Northwest Territories and West Kelowna, B.C.
The takeaway
High interest rates are finally working their way through the economy and are moderating activities. The economy will muddle through the rest of the year as businesses and households navigate a restrictive interest rate environment.
