The Canadian economy experienced a slowdown in the second quarter, with investment in housing continuing to decline. According to Statistics Canada, the economy contracted at an annualized rate of 0.2 percent in the second quarter. This was accompanied by a drop in housing investment, particularly in new construction, which fell 8.2 percent in the quarter. Renovation spending also decreased by 4.3 percent. The decline in spending can be attributed to higher borrowing costs faced by Canadians due to interest rate hikes by the Bank of Canada. Additionally, lower inventory accumulations, slower growth in exports, and a decrease in household spending were contributing factors to the economic weakness in the second quarter.
The growth in exports of goods and services was only 0.1 percent in the second quarter, as opposed to the 2.5 percent increase in the first quarter. Real household spending also slowed, growing by only 0.1 percent compared to 1.2 percent in the first quarter. Chief economist at the Conference Board of Canada, Pedro Antunes, expressed surprise at the stalled economy, stating that the Bank of Canada and analysts had expected stronger growth. Antunes also suggested that the central bank should hold off on further rate hikes, as consumer spending seems to be slowing down due to tightened monetary policy. He emphasized that it is not just about raising rates, but also about managing expectations and sending a strong message regarding the bank’s policies.
The construction industry has been significantly affected by the economic slowdown, particularly in the retail and wholesale sectors. The decrease in construction is not unexpected, as interest rates have risen dramatically. Colin Snaith, a senior manager with SG Constructors, mentioned that the number of homes being built, especially in the high-rise sector, has decreased. He attributed this to the higher interest rates, although current ongoing projects have not been affected as they were initiated prior to the rate increases. Snaith added that there is a backlog of construction projects, but their start dates have been pushed back, with the pre-construction period extended. He mentioned that caution is prevalent among investors, as financing is often tied to sales, and with home sales experiencing a decline, they are waiting for interest rates to stabilize.
In terms of non-residential structures, business investment saw a gain of 2.4 percent in the second quarter, driven by a 3.3 percent increase in spending on engineering structures. Overall, the economy contracted by 0.2 percent in June, with services-producing industries dropping 0.2 percent and goods-producing industries contracting 0.4 percent. Statistics Canada’s early estimate for July indicates that real GDP remained unchanged, although this figure may be updated. The report comes just before the Bank of Canada’s upcoming interest rate decision, set for the following Wednesday. The central bank has expressed concerns about progress toward their two percent inflation target potentially stagnating, leading to the rate increases in July.