Canadian Economy "Just Managing to Keep Its Head Above the Water" as GDP Contracts

By Ketki Saxena 

Investing.com – The Canadian economy grew 0.1% in November, Statistics Canada reported in line with economist expectations, and matching the increase in October. 

In November, growth in real domestic product was driven by the public sector, transportation and warehousing and finance and insurance. Meanwhile, construction, retail and accommodation and food services

Preliminary data shows the economy grew 0.1% in December. Cumulatively, the monthly gains calculate to annualized Q4 growth of 1.6% -  sharply lower than 2.9% growth in Q3 and 3.2% in Q2.

However, the economy remains more robust than the Bank of Canada’s estimate of 1.3% annualized growth in Q4. Growth for full year 2022 also looks set to remain above the BoC’s estimate of 3.6% growth, currently on track to notch a 3.8% gain for 2022. Official data for December and the fourth quarter will be released Feb. 28.

“The overriding message is that the economy is just managing to keep its head above water, which squarely fits with the BoC’s view,” noted Doug Porter, chief economist at Bank of Montreal (TSX:BMO). 

The sharp contraction in the Canadian economy is a (deliberate) result of the Bank of Canada’s intensive rate hike cycle to cool an economy in excess demand, and temper inflation which remains at decade high levels and more than 3 times the Bank of Canada’s target. 

The Bank of Canada has raised its key interest rate eight consecutive times and 425 basis points since March, bringing the bank’s benchmark policy rate to 5% - its highest level since2007.

After its latest 25 basis point hike last week, the Canadian central bank indicated that it will likely pause its rate-hike cycle, conditional on further data to determine the effect of previous rate hikes on the economy so far. 

Nathan Janzen, senior economist at RBC (TSX:RY) notes, "A lot of the impact of interest rate increases from the Bank of Canada to date, haven't yet flowed through fully to household purchasing power," said Janzen. 

"So we still do expect GDP growth to continue to slow and get into negative territory over the first half of this year."

This is a view reinforced by TD (TSX:TD) senior economist James Orlando.

“The economy hasn’t yet absorbed the impact of past rate hikes. Though we are seeing the beginning of this, there is more to come, with GDP and employment growth set to stall in the coming months.”

Economists widely expect Canadian GDP to contract in the first two quarters of 2023, leading to a shallow recession in the first half of the year.

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