Canada’s economic growth has flatlined for the second straight month, and has now undershot expectations for the past five months.

Real Gross Domestic Product (GDP) growth was unchanged in August, according to data released today by Statistics Canada. This follows a flat reading in July and a 0.2% month-over-month decline in June.

Looking ahead, StatCan’s advance estimate for September is for yet another flat reading, which would mean an annualized decline of 0.1% for the third quarter as a whole. This would be well below the Bank of Canada’s latest forecast for +0.8% annualized growth in Q3.

“Higher interest rates are certainly doing their part to tamp down excess demand, and we continue to expect below-trend growth for the next couple of quarters,” noted Marc Ercolao of TD Economics.

“We anticipate an even deeper drop in Q4 GDP as the full impact of higher interest rates causes consumers to pull back and the prolonged housing downturn to deepen,” economists at Oxford Economics added in a research note.

In addition to high interest rates, StatCan noted that inflation, forest fires and drought conditions also weighed on the economy in the quarter, with just 8 of 20 sectors reporting growth.

Goods-producing industries saw a 0.2% monthly contraction in August, led by manufacturing (-0.6%), which contracted for the third straight month. Accommodation and food services also saw a 1.8% contraction.

For now, additional rate hikes appear to be off the table

The general consensus among economists is that, while bringing inflation back to target remains the number one priority for the Bank of Canada, the general consensus among economists is that no further rate hikes will be needed to slow economic growth.

“This is yet one more crystal-clear sign that the Bank of Canada should be done hiking,” wrote BMO economist Benjamin Reitzes.

“The potential for a second consecutive negative quarterly GDP reading will cause recession chatter to ramp up quickly,” he added. “The soft economic backdrop, which still has downside, will drive inflation down over time…it’s just a question of how quickly.”

Economists at National Bank note that the Canadian economy is actually performing weaker than it appears on the surface when taking into consideration “soaring” population growth.

“When you factor in the demographic boom, the sluggishness of the Canadian economy becomes more apparent as evidenced by GDP per capita, which plunged in the third quarter, posting a 2.4% year-on-year decline, the first time this has occurred outside of a recession,” the economists noted.

They anticipate continued “economic lethargy” over the coming months, particularly given that by their estimates 43% of the impact of previous rate hikes still have yet to be felt by the broader economy.

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Last modified: October 31, 2023