The Canadian economy showed concerning signs of weakness as May’s GDP figures confirmed what many economists have been warning about – a slowdown is underway. Statistics Canada reported the economy contracted by 0.2% in May, extending April’s stagnation and raising questions about whether the Bank of Canada‘s aggressive rate-cutting plan will be enough to prevent further deterioration.
For everyday Canadians already struggling with persistently high grocery bills and housing costs, this contraction represents more than just a statistic. The slowdown was broad-based, touching multiple sectors and suggesting underlying structural issues beyond seasonal factors.
“What we’re seeing isn’t just a blip – it’s a meaningful slowdown across several key industries,” explains Royce Mendes, managing director and head of macro strategy at Desjardins. “Manufacturing, retail, and even some services sectors are showing signs of strain.”
The manufacturing sector was particularly hard hit, contracting 1.6% as both durable and non-durable goods production fell. Factory floors across Ontario and Quebec have been quieter as consumer demand wanes and businesses hold back on investments amid uncertainty.
Retail trade dropped 0.7%, continuing a troubling trend as Canadians tighten their belts. When adjusted for inflation, retail sales have essentially gone nowhere for nearly three years – a stark indicator of how stretched household budgets have become under the weight of higher interest rates and stubborn inflation.
Even the typically resilient services sector showed weakness, with transportation and warehousing down 0.5%. The only significant bright spots came from public sectors and utilities, hardly the growth engines needed for a robust economy.
Bank of Canada Governor Tiff Macklem now faces a delicate balancing act. After cutting rates by 25 basis points in June and following with a larger 50-basis-point cut in July, markets are pricing in more aggressive easing through year-end. The central bank’s own forecast of 1.2% growth for 2024 now looks increasingly optimistic.
“The Bank of Canada has shifted from fighting inflation to preventing a harder landing,” notes Benjamin Reitzes, managing director of Canadian rates at BMO Capital Markets. “The question isn’t whether they’ll cut rates again in September, but by how much.”
There were modest signs of hope in Statistics Canada‘s preliminary estimate for June, which indicated a potential 0.2% rebound. However, this would still leave second-quarter growth essentially flat – a far cry from the robust recovery many had hoped for as interest rates began coming down.
For small business owners like Mira Patel, who runs a home goods store in the Greater Toronto Area, the numbers confirm what she’s been experiencing firsthand. “Customer traffic is down, and when people do come in, they’re much more selective about what they buy,” she tells me during a recent visit. “Three years ago, they’d come in for one thing and leave with three. Now they stick strictly to their list.”
The housing market’s response to lower rates has been tepid at best. While resales showed some life in June and July, construction remains subdued. Housing starts fell 6% in June compared to the previous month, according to Canada Mortgage and Housing Corporation data, suggesting builders remain cautious despite the improved interest rate environment.
For the Canadian dollar, which has already weakened against its U.S. counterpart this year, the GDP contraction adds further downward pressure. Currency traders are betting the Bank of Canada will need to cut rates more aggressively than the U.S. Federal Reserve, potentially widening interest rate differentials between the two countries.
The broader context matters too. Canada’s economy has consistently underperformed relative to the United States over the past year. While U.S. GDP grew at a surprising 2.8% annualized rate in the second quarter, Canada appears stuck in neutral or possibly reverse.
Part of Canada’s challenge lies in productivity growth – or rather, the lack of it. Labour productivity has declined for eight consecutive quarters, an unprecedented streak in modern Canadian economic history. This fundamental weakness makes it harder for the economy to generate non-inflationary growth, even as interest rates come down.
“We have structural issues that go beyond monetary policy,” argues Pedro Antunes, chief economist at the Conference Board of Canada. “Immigration has boosted our headline GDP numbers, but on a per capita basis, Canadians have been getting poorer.”
The months ahead will be critical. The Bank of Canada meets again in September, and market expectations have shifted toward another 50-basis-point cut. But as other central banks, including the Federal Reserve, also pivot toward easing, the competitive landscape remains challenging.
For workers, the slowdown hasn’t yet translated into widespread job losses – unemployment remains relatively low at 6.4%. However, job creation has slowed dramatically compared to 2023, and more businesses report scaling back hiring plans.
The federal government faces its own challenges with a structural deficit and limited fiscal room to provide stimulus. Finance Minister Chrystia Freeland has emphasized the need for fiscal restraint, even as economic growth disappoints.
As summer turns to fall, Canadians find themselves at an economic crossroads. The rate cuts that began in June were supposed to mark the beginning of a recovery phase. Instead, May’s contraction suggests the economic challenges run deeper than high interest rates alone.
For everyday Canadians hoping for relief from financial pressures, the path forward remains uncertain. Lower mortgage rates will eventually provide some breathing room for homeowners, but the broader economic malaise could limit job opportunities and wage growth.
The coming months will determine whether Canada is experiencing a temporary slowdown or the beginning of a more prolonged period of economic weakness. Either way, both policymakers and households would be wise to prepare for a bumpy road ahead.
