Canada’s economy stalls in August, seen slipping into recession in Q3

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -The Canadian economy stalled in August and likely slipped into a shallow recession in the third quarter, data showed on Tuesday, a sign the central bank’s 10 interest rate hikes since last year are weighing on growth.

With the economy stumbling along slower than the Bank of Canada forecast just last week, analysts said there is no need to raise rates again from 5.0%, a 22-year high. The Canadian dollar was trading lower, near its weakest level in a year.

The August result was slightly lower than 0.1% month-over-month rise forecast by analysts polled by Reuters. July GDP was revised to being marginally negative from an initial report of zero growth, Statistics Canada said.

In a flash estimate, the economy was likely also unchanged in September, and Statscan officials said that translated into an annualized 0.1% decline in the third quarter, marking a second consecutive quarter of negative growth after a 0.2% decrease in the previous quarter.

“Whether or not the economy is already in recession is less important than the fact that the lagged impacts of monetary policy are likely to materially depress economic activity moving forward,” said Tiago Figueiredo, an economist at Desjardins, in a note.

“As a result, we expect the economy to more clearly enter a recession in 2024. This data reaffirms our view that the Bank of Canada is done raising rates for this cycle,” Figueiredo said.

The statistics agency said high interest rates, inflation, forest fires and drought conditions hurt growth in August. The central bank has said its previous rate hikes are sinking in.

The projected contraction in third-quarter annualized growth is far lower than the Bank of Canada (BoC) forecast last week. The BoC forecast GDP growth would expand 0.8% in the third quarter, down from 1.5% projected in July.

BoC Governor Tiff Macklem said after last week’s rate decision that there may not be a need for another rate increase if inflation cools in line with the central bank’s expectations.

“Given the fact that Canada has yet to feel the full impact of prior rate hikes, there’s still more downside risk ahead for the economy,” Benjamin Reitzes, macro strategist at BMO Capital Markets, said in a note.

“This is yet one more crystal clear sign that the Bank of Canada should be done hiking,” Reitzes said.

Money markets see a roughly 90% chance the central bank will leave interest rates on hold at its next policy announcement in December, while the Canadian dollar was trading 0.3% lower at 1.3865 to the greenback, or 72.12 U.S. cents.

Canada’s goods-producing sector contracted 0.2%, dragged down by the third consecutive month of declines in the manufacturing sector.

The service-producing sector posted a 0.1% rise, in part helped by the wholesale trade and the transportation and warehousing subsectors.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; additional reporting by Dale Smith; editing by Jonathan Oatis)