Canada’s Economy Loses Momentum as Rate Hikes Take Hold
Early indicators from Statistics Canada show the country’s economy is slowing but might not be in recession territory yet. The agency released new gross domestic product (GDP) data, showing the economy grew at a rate of 0.1% per cent in November.
Early indications show that the country’s GDP was essentially unchanged for December. Overall, StatCan said advance information suggests a 1.6% annualized increase in GDP for the fourth quarter of the year and annual growth of 3.8% in 2022.
Economic growth is expected to slow in response to higher interest rates, with many economists anticipating a mild recession this year. A recession is traditionally defined as two consecutive quarters of negative GDP growth.
“Overall, today’s data show that the Canadian economy continues to cool, but not as yet shift into reverse, in the face of rising interest rates,” said CIBC Senior Economist Andrew Grantham in a note to clients on January 31.
The Bank of Canada has raised its key interest rate eight consecutive times since March, bringing it to 4.5%, the highest it’s been since 2007. After hiking interest rates in January, the central bank signalled it would take a pause to assess how higher interest rates are affecting inflation and the economy.
In November, growth in real domestic product was driven by the public sector (0.3%), transportation and warehousing (1.0%) and finance and insurance (0.5%).
Construction contracted 0.7% in November, as a result of declines across almost all subsectors. Residential building construction was the main driver behind November’s decrease, contracting 1.8%.
Retail trade declined 0.6% in November, as 8 of 12 subsectors decreased. The most notable declines were at food and beverages stores (-1.8%), building material and garden equipment and supplies dealers (-2.9%), as well as general merchandise stores (-1.6%).
U.S. Economy Grew Faster Than Expected in Fourth Quarter; Weekly Unemployment Claims Fall
The U.S. economy grew faster than expected in the fourth quarter, but that likely exaggerates the nation’s health as a measure of domestic demand rose at its slowest pace in 2-1/2 years, reflecting the impact of higher borrowing costs.
The Commerce Department’s advance fourth-quarter gross domestic product report showed half of the boost to growth came from a sharp rise in inventory held by businesses, some of which is likely unwanted.
While consumer spending maintained a solid pace of growth, a big chunk of the increase in consumption was early in the fourth quarter. Retail sales weakened sharply in November and December. Business spending on equipment contracted last quarter and is likely to remain on the backfoot as demand for goods softens.
It could be the last quarter of solid GDP growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s are fully felt. Most economists expect a recession by the second half of 2023, though a short and mild one compared to previous downturns, because of extraordinary labour market strength.
“The U.S. economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “That should limit the Fed to just two more small rate increases in coming months.”
Gross domestic product increased at a 2.9% annualized rate in Q4. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP would rise at a 2.6% rate.
Robust second-half growth erased the 1.1% contraction in the first six months of the year. For 2022, the economy expanded 2.1%, down from 5.9% in 2021. In 2022, the Fed raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.1% rate, mostly reflecting a rebound in goods spending at the start of the quarter, mostly on motor vehicles. Consumers also spent on services like health care, housing, utilities and personal care.
Spending, which grew at a 2.3% pace in the third quarter, has been underpinned by labour market resilience as well as excess savings accumulated during the COVID-19 pandemic. Income at the disposal of households after accounting for inflation increased at a 3.3% rate after rising at a 1.0% pace in the third quarter. The saving rate rose to 2.9% from 2.7%.
But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower income, have depleted their savings. As a result, inventories surged at a $129.9-billion rate compared to a $38.7-billion rate in the prior quarter, adding 1.46% to GDP growth. There also were contributions from government spending and a smaller trade deficit.
Stripping out inventories, government spending and trade, domestic demand increased at only a 0.2% rate. That was the smallest increase in private domestic final sales since the second quarter of 2020 and was a deceleration from the third quarter’s 1.1% pace.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. Prices of U.S. Treasuries fell.
Despite clear signs of a weak handover to 2023, some economists are cautiously optimistic the economy will skirt an outright recession, suffering instead a rolling downturn where sectors decline in turn rather than all at once.
They argue that monetary policy now acts with a shorter lag than was previously the case because of advances in technology and the U.S. central bank’s transparency, which they said resulted in financial markets and the real economy acting in anticipation of rate hikes.
Though residential investment suffered its seventh straight quarterly decline, the longest such streak since the collapse of the housing bubble triggered the 2007-2009 Great Recession, there are signs the housing market could be stabilizing.
Mortgage rates have been trending lower as the Fed slows the pace of its rate hikes.
“A large portion of the reaction to higher interest rates is already in the economy and the financial markets,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Since the Fed has succeeded in precipitating a rolling recession, it is time to think about an exit strategy.”
Inflation also subsided in the fourth quarter. A measure of inflation in the economy rose at a 3.2% rate, retreating from the third quarter’s 4.8% pace of increase.
While many parts of the economy have shifted to lower gear, the labour market is showing no signs substantial cooling. A separate report from the Labor Department showed initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21, the lowest level since April 2022. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended Jan. 14.
Companies outside the technology industry as well as interest-rate sensitive sectors like housing and finance are hoarding workers after struggling to find labour during the pandemic. “There are no signs in the latest jobless claims data that the labour market is cracking at the start of the new year,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
Source: Globe and Mail