Canada at risk of ‘tipping into a mild recession’ after flat GDP reading

Early signs that Canada’s economy stalled in the third quarter of the year is likely to “ramp up” conversations about a recession hitting the country, some economists argue.

Real gross domestic product (GDP) was essentially unchanged in August, Statistics Canada said Tuesday, pointing to the impacts of extreme weather.

Higher interest rates are weighing on economic growth as people and businesses pull back on spending. Drought conditions and forest fires raging through the month also helped to pull down economic growth.

Resource extraction sectors such as mining and oil and gas saw growth in August, while manufacturing and the accommodation and food services industries faced declines.

Retail trade also fell for the third month in a row.

Air, rail and water transportation sectors all saw gains, with StatCan saying the latter’s rebound fully offsetting declines tied to the B.C. port strike in July.

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StatCan on Tuesday also said revised its estimates for GDP growth in July from essentially flat to marginally negative.

Early estimates suggest September’s GDP reading was also flat, setting Canada’s economy up for a stalled third quarter of growth. These early estimates will be updated on Nov. 30, StatCan said.

The Bank of Canada’s most recent projections had expected economic growth for the third quarter would come in at 0.8 per cent.

CIBC senior economist Andrew Grantham said in a note to clients Tuesday morning that the possibility of a stall or even a decline in the third quarter means Canada “appears close to tipping into a mild recession.”

Canada’s economy contracted by 0.2 per cent in the second quarter of the year. A second straight quarter of GDP decline would meet the definition of at technical recession for many economists.

Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, also expects the “recession chatter to ramp up quickly” after Tuesday’s GDP report.

The economy is at risk of falling further with the full impact of the Bank of Canada’s rate hikes yet to take hold, he argued in a note to clients.

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

Grantham said the weakening economic data should reduce the chances of any further interest rate increases and get financial markets thinking about rate cuts. That should also weigh on the Canadian dollar, he noted.

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