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Canadian economy loses steam, expected to slow further amid high interest rates

OTTAWA — The Canadian economy lost steam as 2022 drew a close, setting the stage for a continued slowdown this year as high interest rates weigh on spending.
People shop for produce at the Granville Island Market in Vancouver, on Wednesday, July 20, 2022. Canada's inflation rate was up 8.1 per cent in June compared with a year ago, its largest yearly change since January 1983. Statistics Canada will release its November reading of gross domestic product this morning.THE CANADIAN PRESS/Darryl Dyck

OTTAWA — The Canadian economy lost steam as 2022 drew a close, setting the stage for a continued slowdown this year as high interest rates weigh on spending.

Statistics Canada's preliminary estimate for real GDP in December indicates the economy neither grew nor contracted, suggesting the economy grew at an annualized rate of 1.6 per cent in the fourth quarter of last year.

In comparison, the economy grew at an annualized rate of 2.9 per cent in the third quarter of 2022.

RBC assistant chief economist Nathan Janzen said the latest GDP report adds more evidence that the economy is indeed losing momentum.

And that trend is expected to continue, he said.

"The key when you look forward is really that 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."

Economists said the full effects of interest rate hikes usually takes between 12 months and 18 months to fully work its way through the economy.

Since March, the Bank of Canada has raised its key interest rate eight consecutive times. The central bank said last week that it is taking a conditional pause on any further hikes to the key rate, which now stands at 4.5 per cent, keeping the door open to further increases if inflation isn't tamed.

The economy, which was roaring in the first half of 2022 as it rebounded from the COVID-19 pandemic, grew by 0.1 per cent in November, the federal agency said Tuesday.

Statistics Canada estimates the economy grew by 3.8 per cent last year.

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

Growth in real domestic product for November was driven by the public sector, transportation and warehousing and finance and insurance.

Statistics Canada’s report notes that the removal of COVID-19 travel restrictions have spurred growth in transportation and warehousing.

Meanwhile, construction, retail and accommodation and food services contracted.

"You're starting to see more signs of maybe cracks in the consumer spending backdrop," said Janzen, noting the declines in retail trade and accommodation and food services indicate consumers are pulling back.

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

That slowdown is expected to extend to other sectors in the economy and impact employment levels as businesses facing lower sales adjust hiring plans.

Canada's annual inflation rate has slowed since the summer and reached 6.3 per cent in December. The central bank wants to see the inflation rate fall back to its two per cent target and expects that to happen in 2024.

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

"We still do expect GDP growth to continue to slow and get into negative territory over the first half of this year," said Janzen.

This report by The Canadian Press was first published Jan. 31, 2023.

Nojoud Al Mallees, The Canadian Press