Another Flat Reading for GDP Proves Economy Has Eased

Key Insights

After another month of no growth and advanced estimates showing the same in September, it is clear that Canada’s economy has come to a standstill. Two consecutive quarters of negative or minimal growth suggest that the economy is feeling the impact of historically high interest rates. There’s some good news that September’s inflation data showed consumer prices decelerated from the previous month including core inflation measures, although inflation remains stubbornly high. These indicators helped the Bank of Canada hold interest rates for October. However, they did indicate that door is left open to more increases if core inflation doesn’t continue a downward trend, and labour markets continue to surprise.

Internationally, a pressing concern on everyone’s mind is the Middle East conflict. It remains challenging to predict the full extent of the impact on financial markets, given the evolving nature of the conflict. Factors such as higher oil prices and disruptions in supply chains could affect short-term consumer prices. On the other hand, Canada’s two biggest trading partners have recently had positive data releases. In China, recent GDP figures indicate that the worst of its post-pandemic economic downturn might be behind as consumer-driven growth fuels a recovery. In the United States, recent retail sales data exceeded many forecasts, and industrial production has strengthened, indicating an economy that continues to grow. Both factors will bolster Canada’s export markets, providing support for the economy during this period of slowing growth.

Looking at Canada’s economy over the medium term it appears that higher borrowing costs may be here to stay. While interest rates will move lower from their peaks now, it’s unlikely that we will return to pre-pandemic rates in the foreseeable future. Factors that drove interest rates lower for more than a decade before the pandemic are now reversing. Key drivers include a reverse in the global savings rate from shifting demographics and China’s shrinking trade surpluses, rising productivity gains from artificial intelligence, and broader investments in climate change all point to a world where interest rates will remain higher. What this means is that consumers, businesses, and governments would all face higher borrowing costs. Perhaps the biggest shift would come from governments, who have become accustomed to lower rates as debt levels reach near record highs across the developed world. Governments, who already face long-term challenges to their finances from demographics, will especially struggle with the new burden of higher interest rates.

For additional research on GDP in Canada, please visit our research series, GrowthNow. GrowthNow utilizes current or recent economic data to estimate the GDP growth rate for the current quarter before official figures are published.