The economy is slowing, and it should continue to do so due to rate hikes

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Economy is slowing, and should continue to do so due to rate hikes

 

Goods-producing businesses fared worse in November than service-producing industries, according to Statistics Canada.

The Canadian economy lost steam at the end of 2022, setting the stage for a sustained slowdown this year as high interest rates weigh on expenses.

Statistics Canada’s preliminary estimate of real gross domestic product (GDP) in December suggests that the economy did not grow but did not contract either, suggesting that the economy is estimated to have grown at an annualized rate of 1.6% in the fourth quarter of last year.

In comparison, the economy grew at an annualized rate of 2.9% in the third quarter.

Royal Bank Deputy Chief Economist Nathan Janzen said he believes the latest GDP report provides new evidence that the economy is indeed losing steam.

And that trend is set to continue, he predicted.

“Much of the impact of price increases Bank of Canada’s interest rate to date has yet to fully impact household purchasing power.

—Nathan Janzen, Deputy Chief Economist, Royal Bank

Economists estimate that the full impact of interest rate hikes typically takes 12 to 18 months to materialize in the economy.

As of March 2022, the Bank of Canada has raised its key rate eight times in a row. The central bank indicated last week that it will now pause and not touch its rate, currently set at 4.5%.

It still left the door open to further hikes if inflation was still out of control.

The economy, booming in the first half of 2022 due to a rebound in the wake of the COVID-19 pandemic, grew by 0.1% in November, Statistics Canada said Tuesday.

The federal agency estimates the economy grew 3.8% in 2022.

However, the pace of growth slowed in the second half of the year, coinciding with aggressive interest rate hikes by the Bank of Canada.

November’s economic growth was notably boosted by the public sector, the transportation and warehousing sector, and the finance and insurance sector.

The Statistics Canada report noted that the removal of COVID-19 travel restrictions boosted growth in the transportation and warehousing group.

At the same time, the construction, retail trade and accommodation and food services sectors have contracted.

We are starting to see more signs of cracks in consumer spending environment, Janzen observed, noting that declines in retail trade and accommodation and food services point to consumer withdrawal.

The housing market was the first to feel the impact of interest rate hikes, which led to a slowdown in housing-related sectors.

This The slowdown is expected to spread to other sectors of the economy and impact employment levels as companies, struggling with lower sales, get help from head hunters Utah to fill their vacant positions.

Canada’s annual inflation has slowed since last summer and stood at 6.3% in December. The central bank wants to see it fall back to its 2% target and expects that to happen in 2024.

Meanwhile, many economists are predicting a mild recession in 2023. However, the economy is expected to recover in the second half of the year.

We therefore still expect GDP growth to continue to slow and a it is entering negative territory in the first half of this year, Janzen said.