Q4 economic growth slows to 1.6% as aggressive hikes bite

Canada’s economy geared down at the end of 2022, growing at about half the pace of the third quarter and setting the stage for a period of little to no growth.

Preliminary data suggest gross domestic product was flat in December as increases in retail, utilities and the public sector were offset by decreases in the wholesale, finance and oil and gas industries, Statistics Canada reported Tuesday in Ottawa. That followed a 0.1 percent gain in November, which matched economist expectations in a Bloomberg survey, and a 0.1 percent increase in October.

Overall, the monthly gains point to annualized growth in the fourth quarter of 1.6 percent, according to an initial estimate from the statistics agency. Though it will likely be revised, it’s down sharply from a 2.9 percent pace in the third quarter, 3.2 percent during April to June, and 2.8 percent in the first three months of last year.

The numbers show that higher interest rates, which have jumped 425 basis points since last March, are slowing economic activity and weighing on consumption. The lagged effects of the Bank of Canada’s aggressive tightening campaign are expected to drag growth to a halt this year, with economists seeing two quarters of shallow contraction in the first half of 2023.

That’s a key reason why Governor Tiff Macklem and his officials said this month they plan to hold the benchmark overnight lending rate at 4.5 percent if growth and inflation evolve broadly in line with their outlook. While the 1.6 percent growth in the final quarter is slightly stronger than policymakers forecast last week, signs of slowing demand are mounting.

In November, growth in services-producing industries was partially offset by a decline in the goods sectors, the agency said. Interest-rate increases continued to dampen activity for real estate agents and brokers, residential building construction, and legal services which have been trending downward since spring.

Construction dropped 0.7 percent, with new construction of single detached homes and home improvement leading the decline. Accommodation and food services contracted 1.4 percent on lower activity in bars and restaurants. Retail trade decreased 0.6 percent, with the food and beverage subsector falling to its lowest level since April 2018.

The central bank expected fourth-quarter growth of 1.3 percent annualized, while economists in Bloomberg surveys predicted a gain of 0.9 percent. Official data for December and the fourth quarter will be released Feb. 28.

Based on initial estimates, Canada’s economy expanded 3.8 percent in 2022, broadly in line the Bank of Canada’s estimate for a 3.6 percent growth.