Canada faces slower economic growth with a 3.3% GDP increase in the second quarter

Although Canada’s economy showed growth in the second quarter supported by rising commodity prices and the lifting of COVID lockdowns, there are still certain signs of a slower pace.

According to Statistics Canada, GDP was up by 3.3% on a year-over-year basis, following 3.1% reported in June. The main drivers of economic growth were stronger household consumption and business spending on inventories. Meanwhile, economists polled by Bloomberg, predicted 4.4$ for Q2.

Such results point to a hot economy for the most part of the first half of 2022, while the US and other countries don’t seem to catch up. However, a cooler period is starting amid the record high inflation and growing interest rates.

“We expect slower economic growth during the second half of the year and entering into a ‘moderate’ recession in 2023,” – Nathan Janzen, assistant chief economist at Royal Bank of Canada, noted.

The recent reports say the economy contracted by 0.1% last month, following a small increase by 0.1% seen in June and no changes in May. This also proves the growth pace is slowing down.

Economists believe Canada’s annual GDP will fall below 1.5% in the second half of 2022 and into 2023, restrained by one of the most aggressive rate hiking cycles ever by the central bank.

The Bank of Canada had expected 4% for Q2. The weaker-than-expected results were partially caused by strong growth in imports, as the household and business spending that goes to purchasing goods and services from other countries is not considered a domestic output.

As you know, the BoC has already raised its key lending rate by 2.25% since March, and more hikes are expected for this year. Now, investors are almost fully pricing in another 0.75% rise at the Bank’s next meeting on September 7.

The recent data shows the influence of rate increases in Canada is already being felt. The second quarter brought a year-over-year decline in residential investment by 28%, marking one of the strongest declines on record. The biggest one was reported during the peak of the pandemic.