Canada Sees Unexpected Economic Contraction

August 31, 2023

Our neighbors to the north got an unexpected surprise this week as the nation’s economy contracted during the second quarter amid the central bank’s aggressive rate hikes.

Canada’s gross domestic product (GDP) shrank at a 0.2% annualized pace during the second quarter, far weaker than the consensus estimate of 1.2% growth and the Bank of Canada’s 1.5% forecast. It marks a rapid deceleration from the first quarter’s 2.6% pace of growth.

The Canadian economy saw declines across the board as housing investment, inventory accumulation, exports, and household spending all saw a substantial slowdown. 

The report paints a compelling picture of an economy that is beginning to strain under the 475 basis points of rate increases enacted by the Bank of Canada, bringing interest rates to a 22-year high.

Droughts and wildfires have also contributed to the contraction, disrupting industries like crop production, oil and gas extraction, mining, and recreational activities like camping.

Economists are hopeful that the economic downturn will allow the central bank to avoid further rate hikes. Trading activity puts the odds of another hike at 1-in-10, down from 1-in-4 the previous day.

Still, much of the data from the latest GDP report comes from the period before the most recent rate hike, so the full impact of the economic tightening is still unknown. Growth in consumption is expected to continue slowing during the second half of the year, meaning Canada could well see a second consecutive quarter of GDP contraction and could already be in the midst of a technical recession.


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