The Canadian economy edged slightly higher in August and initial estimates pointed to growth continued in September as worries of an impending recession grow. Statistics Canada said real growth domestic product gained 0.1% in August, topping its initial estimate that suggested no growth for the month.
In its initial estimate for September, the agency indicated the economy grew by 0.1% again. The preliminary estimate for September puts the annualized growth rate for the third quarter at 1.6% for the July-to-September period, down from an annual pace of 3.3% in the second quarter.
Karyne Charbonneau, executive director, economics, at CIBC, said the economy may have slowed, but the good news is there was at least some growth. “While we will be revising our overall 2022 growth expectation to be a tad higher, this does not alter our view that the economy will stall in the months ahead, and the lack of momentum late in Q3 is aligned with that,” Charbonneau wrote in a report.
“With these latest growth figures only slightly below estimates of potential growth, we will need to see this further slowing of the economy to bring inflation back to target. This supports the notion that while we are getting closer to the end of the hiking cycle, there is still a little left to do.”
The Bank of Canada hiked its key interest rate target by half a percentage point to 3.75% as it said the economy is overheated, meaning demand is outpacing supply. And while the central bank said it is nearing the end of its rate tightening cycle, governor Tiff Macklem said it isn’t done yet and more rate hikes are expected to be needed. Its next scheduled interest rate decision is set for Dec. 7.
Higher borrowing costs have started to take a toll on growth with home sales in Canada taking a hit as higher mortgage rates have increased costs for homebuyers.
In its latest monetary policy report, the Bank of Canada forecast growth at an annual rate of 1.5% for the third quarter before slowing to an annual pace of 0.5% in the final three months of the year.
TD Bank senior economist James Orlando said though the data was encouraging, the overarching narrative of a decelerating Canadian economy hasn’t changed. “Given high inflation and the lagged impact of higher interest rates, we are seeing the effect of this in the goods sector and expect to see the same in the service side going forward,” Orlando wrote in a report. “The Bank of Canada decided to slow its pace of rate hikes on [October 26] as it believes a slowing in economic growth is forthcoming. Though this is starting to show up in the data, we think the BoC will need to continue to raise its policy rate to 4.25% in order to achieve the deceleration that is sufficient to bring down inflation.”
In its report, Statistics Canada said growth in services-producing industries was offset by a decline in good-producing industries. The report said the retail trade sector rose 1.2% in August after falling to its December 2021 level in July, while wholesale trade gained 0.9% and the agriculture, forestry, fishing and hunting sector added 3.9% in the month, led by an increase in crop production. The public sector expanded 0.3% in August.
Meanwhile, the construction sector is still 8% above the February 2020 pre-pandemic level.
The manufacturing sector fell 0.8%, while mining, quarrying and oil and gas extraction contracted 1.0% in August.