Canadian Economy Faces Some Headwinds

(MENAFN- Caribbean News Global) By BDC

MONTREAL, Canada – True to expectations, Canada's GDP stalled in August, following a monthly increase of just 0.1 percent in July. It was a mixed – and far from ideal picture – in August. The goods sector shrank (-0.4%) to its lowest level since December 2021 while the service sector, which accounts for a larger share of total GDP, grew modestly.

In September, the Canadian Economy expanded but just barely, according to preliminary data from Statistics Canada. Growth was expected to reach 0.3 percent, bringing growth for all of Q3 to below 1.0 percent.

In the first eight months of the year, the Canadian economy grew by 1.1 percent compared with the same period in 2023. Considering the headwinds buffetting the economy, growth is likely to slow further in the final quarter of the year, or even decline for a month or two, putting growth at around 1.0 percent for the year as a whole.

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Overcapacity continues to hold back growth

High interest rates over the past two years have depressed demand and the capacity utilization rate in the industrial (goods) sector is still at one of the lowest levels (79.1%), excluding any economic crisis, since Statistics Canada has been tracking this data.

Construction remains the sector where capacity utilization has fallen the most since the Bank of Canada began raising interest rates in March 2022. The natural resources sector is also struggling to return to pre-pandemic levels (with the exception of mining and fossil fuels).

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According to the Bank of Canada's latest Business Outlook Survey, the vast majority of Canadian companies are reluctant to invest or hire, judging that they have adequate capacity to meet current and anticipated demand. In the absence of more favourable sales prospects, business investment will remain limited. Companies may also choose to delay investments because financing costs are still high.

BoC takes an axe to interest rates

A slowing economy and well-controlled inflation prompted the Bank of Canada to lower interest rates earlier than most central banks. The bank had cut its key rate three times in a row by 25 basis points in June, July and September, before the Board of Governors opted for a jumbo 50-basis-point cut in October.

The Bank of Canada still has one rate announcement to make before the end of the year. A further cut is expected on December 11, but its size will depend on the latest data available when the bank makes its decision.

Canadian households and businesses are likely to benefit from further interest rate relief in the first half of 2025 as well. The central bank could lower rates more quickly than now expected to a neutral 2.75 percent if inflation, the labour market or GDP slow more than anticipated.

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Job market stalls in October

Following an upturn in private-sector job creation in September, the Canadian labour market remained fairly stable in October. The Canadian economy created almost 15,000 net jobs over the past month.

The recent announcement of lower immigration targets for 2025 and 2026 will lead to a slight contraction in the Canadian population. New residents were responsible for 98 percent of population growth in 2023 and 2024. With an aging population, the change in immigration policy will limit the total number of hours worked. This will probably halt the recent rise in the country's unemployment rate despite the slow economy.

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What does this mean for entrepreneurs?