The Canadian economy ended 2022 with a sharper-than-expected slowdown amid higher interest rates, but appears to have regained momentum at the start of the new year.
According to Statistics Canada, gross domestic product (GDP) stalled in the fourth quarter of 2022, after five consecutive quarters of growth.
In its report released on Tuesday, the federal agency paints a picture of a much bleaker economy than forecasters expected, as higher interest rates have had a more noticeable impact on the economy.
Statistics Canada’s preliminary estimate had forecast annualized growth of 1.6% for this quarter.
The economic slowdown in the last three months of the year came despite rising consumer and government spending, as well as a stronger trade position for Canada.
After two quarters of record inventories, businesses accumulated less inventory in the fourth quarter, which weighed heavily on real GDP growth.
Real business investment also fell for a third straight quarter as rising interest rates weakened housing investment in 2022.
In December, the economy contracted by 0.1% due to the decline in goods-producing industries.
But the report has some silver linings for Canadians. After declining 0.1% in the third quarter, household spending rebounded 0.5% in the fourth quarter. Household disposable income has also increased faster than their nominal expenditure, allowing them to save more.
The federal agency indicated that the household savings rate had reached 6% in the fourth quarter, against 5% in the previous quarter.
The report attributes this improvement in household finances in part to government benefits, including the additional one-time payment of the Goods and Services Tax Credit and the 10% increase in the Old Age Security pension for seniors. 75 or older.
The Liberal government introduced these measures targeting low-income Canadians to help them cope with the highest inflation.
A preliminary estimate from Statistics Canada suggests the economy rebounded in January, with real GDP growing 0.3%. The agency recalled the provisional nature of these data and indicated that their final, more complete version would be published on March 31.
Last month, the economy added 150,000 jobs, suggesting hiring activity is still on.
But most economists expect the Canadian economy to be unable to avoid a recession in the first half of the year as higher interest rates dampen spending.
Since March 2022, the Bank of Canada has raised its key interest rate from near zero to 4.5%, its highest level since 2007.
The central bank maintains that a slowdown is necessary to bring inflation back to its target of 2.0%.
After peaking at 8.1% over the summer, Canada’s annual inflation slowed to 5.9% in January.
The Bank of Canada expects inflation to slow to 3.0% by mid-2023 and return to the 2.0% target next year.
She hopes inflation can return to target without a sharp economic downturn. At the same time, the central bank stressed that a return to normal price growth was its main objective, which could come at the expense of a more severe economic contraction.