The Canadian economy grew slightly in November and looks to have stalled further at the end of the year as higher interest rates began to slow spending.
Statistics Canada’s preliminary estimate for real GDP in December indicates the economy stayed flat, 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 although the fourth quarter eked out positive growth, the economy was clearly slowing.
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,” he said.
Economists say the full effects of interest rate hikes usually takes between 12 months and 18 months to fully work its way through the economy.
The stalled growth comes after the economy grew by 0.1 per cent in November, the federal agency said Tuesday.
Growth in real domestic product for the month 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.
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 as higher borrowing costs force consumers and businesses to pull back on spending.
The Bank of Canada raised its key interest rate for the eighth consecutive time last week and said it was taking a conditional pause, keeping the door open to further rate hikes if inflation isn’t tamed.
Statistics Canada estimates that for 2022, the economy grew by 3.8 per cent.
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.
“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,” said Janzen.
“So we still do expect GDP growth to continue to slow and get into negative territory over the first half of this year.”
This report by The Canadian Press was first published Jan. 31, 2023.