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After Flat GDP Reading, Canada at risk of ‘tipping into a mild recession’

Some economists believe that Canada’s economy coming to a standstill in the third quarter of the year is likely to intensify discussions about a possible recession in the country.

According to Statistics Canada, the real gross domestic product (GDP) remained virtually unchanged in August, with extreme weather conditions being a significant factor in this stagnation. The higher interest rates have put a drag on economic growth as both individuals and businesses have curtailed their spending. Additionally, drought conditions and forest fires that raged throughout the month contributed to the economic slowdown.

While sectors like mining and oil and gas experienced growth in August, manufacturing, accommodation, and food services industries faced declines. Retail trade also declined for the third consecutive month. On a positive note, air, rail, and water transportation sectors all showed gains, with water transportation’s rebound compensating for previous declines related to the B.C. port strike in July.

These August results follow a previous report by Statistics Canada indicating that growth was essentially flat in July. Early estimates suggest that the GDP reading for September was also flat, suggesting that Canada’s economy might experience a stalled third quarter of growth. These early estimates are scheduled for an update on November 30, as per StatCan.

The Bank of Canada had initially projected economic growth for the third quarter to be at 0.8 percent. However, CIBC senior economist Andrew Grantham expressed concerns that the possibility of a standstill or even a decline in the third quarter indicates that Canada is on the verge of entering a mild recession.

In the second quarter of the year, Canada’s economy contracted by 0.2 percent. If there’s another quarter of GDP decline, it would meet the technical definition of a recession according to many economists.

Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, also anticipates that discussions about a potential recession will gain momentum following the release of the GDP report.

He argues that the economy is at risk of deteriorating further, especially as the full impact of the Bank of Canada’s rate hikes has yet to be fully realized.

Grantham suggested that the weakening economic data should reduce the likelihood of any further interest rate increases and prompt financial markets to consider the possibility of rate cuts. This, in turn, could put pressure on the Canadian dollar.

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