Skip to main content

Economy contracts in second quarter as higher interest rates take hold

Economy contracted at an annualized rate of 0.2% in the second quarter

The Canadian economy appeared to stall in the second quarter as investment in housing continued to fall, led by drop in new construction.

Statistics Canada said Friday (Sept. 1) the economy contracted at an annualized rate of 0.2% in the second quarter.

The agency also revised its reading for growth in the first quarter to an annual pace of 2.6%, down from 3.1%.

READ: Economy grew in May despite wildfire effects, looks to have slowed in June

The decline in the second quarter came as housing investment fell 2.1% to post its fifth consecutive quarterly decrease.

New construction dropped 8.2% in the quarter, while renovation spending fell 4.3%.

The drop in spending came as Canadians face higher borrowing costs fuelled by interest rate hikes by the Bank of Canada, which is trying to bring inflation back to its target of 2%.

The weakness in the second quarter was also attributed to lower inventory accumulations, as well as slower growth in exports and household spending.

Exports of goods and services crept up 0.1% in the second quarter compared with a 2.5% increase in the first quarter.

Growth in real household spending slowed to 0.1% in the second quarter compared with 1.2% in the first quarter.

READ: Statistics Canada reports retail sales up 0.1% in June at $65.9 billion

Meanwhile, business investment in non-residential structures gained 2.4% in the second quarter, boosted by a 3.3% gain in spending on engineering structures.

The overall pullback in the second quarter came as the economy contracted by 0.2% in June.

Services-producing industries dropped 0.2% in June, while goods-producing industries contracted 0.4% for the month.

Statistics Canada also said its early estimate for July suggested real GDP was essentially unchanged for the month, though it cautioned the figure would be updated.

The report comes ahead of the Bank of Canada's interest rate decision set for next week.

The central bank raised its key interest rate target by a quarter of a percentage point to 5% in July as it said it remained concerned that progress toward its 2% inflation target could stall.

This ad will auto-close in 10 seconds