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The Canadian economy appears to have entered a technical recession, with a minor contraction estimated in the third quarter, reinforcing the case for an end to interest-rate hikes.
Preliminary data suggest gross domestic product was unchanged in September, Statistics Canada reported Tuesday. The numbers point to a decline in output of 0.1% annualized for the third quarter, following a 0.2% contraction from April to June.
The Canadian dollar was down about 0.3% to C$1.3864 per US dollar at 9:48 a.m. Toronto time. The yield on Canada two-year notes declined 3 basis points to 4.625%.
Although the data will likely be revised, the projected pace of growth in the last quarter was much slower than the 0.8% forecast by the Bank of Canada earlier this month.
"We’re starting to see more of an impact of higher rates on business bankruptcies,” Pedro Antunes, chief economist at the Conference Board of Canada, said on BNN Bloomberg Television.
"The lack of business confidence is very weak. It’s at recession levels. Consumer confidence keeps coming down as well. There’s a real risk that this could unravel into something deeper.”
Statistics Canada said GDP was flat in August, missing the median estimate for a gain of 0.1% in a Bloomberg survey of economists. Higher interest rates, inflation, forest fires and droughts weighed on the economy, the agency said.
Tuesday’s report supports the central bank’s view that past rate increases are working through the economy, slowing demand and allowing supply to catch up.
Governor Tiff Macklem and his officials held borrowing costs at 5% for the second straight meeting last week even though inflationary risks have increased.
They expect economic growth to remain muted, averaging less than 1% over the next several quarters. The economy is projected to move into modest excess supply in the fourth quarter.
"The fact that the economy appears close to tipping into a mild recession already clearly reduces the likelihood of any further interest rate hikes, and will likely see financial markets pulling forward expectations for rate cuts which will weigh on the Canadian dollar,” said Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce, in a note to investors.
