The Canadian economy appeared to stagnate in the second quarter as housing investment continued to fall, fueled by a drop in new construction.
Statistics Canada said on Friday that the economy contracted at an annualized rate of 0.2 percent in the second quarter.
The agency also revised its first-quarter growth reading to an annual rate of 2.6 percent, from 3.1 percent.
The drop in the second quarter came as housing investment fell 2.1 percent to post its fifth straight quarterly decline. New construction fell 8.2 percent in the quarter, while renovation spending also fell 4.3 percent.
The spending drop came as Canadians face higher borrowing costs driven by interest rate hikes by the Bank of Canada, which is trying to bring inflation back to its two percent target.
The weakness in the second quarter was also attributed to lower inventory buildup, as well as slower growth in exports and household spending.
Exports of goods and services increased 0.1 percent in the second quarter, compared with a 2.5 percent increase in the first quarter.
Real household spending growth slowed to 0.1 percent in the second quarter, compared with 1.2 percent in the first quarter.
Good news: consumer spending has slowed: economist
Pedro Antunes, chief economist at the Conference Board of Canada, said it was a surprise that the economy had stalled.
The Bank of Canada had expected annualized GDP growth of 1.5 percent, while analysts had forecast a 1.2 percent rise.
“We had been thinking that the economy could be a bit stronger than it ultimately came in. I think that’s actually good news,” he said, adding that the central bank’s tighter monetary policy appears to be slowing consumer spending.
“I personally think we should postpone any further rate hikes,” Antunes said.
“The Bank of Canada is playing a tough game here. It’s not just about raising rates. It’s about expectations and getting the message across that [the bank] will be forceful on this issue.
Construction manager says fewer homes are being built
The most affected sectors are retail and wholesale trade, industries that serve homes and offices. According to Antunes, the slowdown in construction is worrying, but not surprising.
“We’re trying to build more housing for, yeah, essentially that strong population growth that we’re going through right now. [But] “It’s not unexpected given the fact that we’ve raised interest rates so dramatically.”
Colin Snaith, a senior manager at SG Constructors, said construction projects are seeing the effects of higher interest rates.
“We’ve definitely seen a reduction in the number of homes being built, particularly in the high-rise sector,” Snaith told Breaking: during an interview at a construction site in Toronto.
“Fortunately, our industry has been pretty busy, but that’s due to the fact that a lot of the projects underway right now were started before interest rates came into effect.”
Snaith said there is a large backlog of construction projects that were scheduled to start soon, but many of their start dates have been pushed back and the lead-up to construction has been extended.
“I think now everyone is being more cautious with their dollar,” he added.
“A lot of times, financing is tied to condo sales and home sales are going down right now. Everyone is waiting for interest rates to stabilize.
Early estimates suggest that real GDP will remain unchanged in July
Meanwhile, business investment in non-residential structures rose 2.4 percent in the second quarter, buoyed by a 3.3 percent increase in spending on engineering structures.
The overall pullback in the second quarter came as the economy contracted 0.2 percent in June.
Service-producing industries fell 0.2 percent in June, while goods-producing industries contracted 0.4 percent.
Statistics Canada also said its initial estimate for July suggested real GDP was essentially flat for the month, though it cautioned that the figure would be updated.
The report is released ahead of the Bank of Canada’s latest interest rate decision, scheduled for next Wednesday.
The central bank raised its key interest rate target by a quarter of a percentage point to 5 percent in July, saying it remained concerned that progress toward its 2 percent inflation target could stall.