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Canada's economy unexpectedly contracts in second quarter, setting up next week's BoC rate decision – The Globe and Mail

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People carry shopping bags in downtown Toronto. Statistics Canada says the Canadian economy contracted at an annual rate of 0.2 per cent in the second quarter of 2023.Fred Lum/The Globe and Mail

The Canadian economy began to buckle under the weight of higher borrowing costs in the second quarter, bolstering the case for the Bank of Canada to hold interest rates steady next week.

Economic activity fell at an annualized rate of 0.2 per cent in the quarter, led by a drop in housing investment and a pullback in consumer spending, Statistics Canada said Friday. A preliminary estimate for July shows gross domestic product growth was flat that month, suggesting that the economy is flatlining as it moves into the second half of the year.

‘Rate hikes are over and done’: How today’s GDP surprise has shifted the views of economists and markets

The GDP numbers came in well below both Bank of Canada and Bay Street estimates, suggesting that higher interest rates are weighing on the economy more than previously appreciated. That solidifies the argument for the Bank of Canada to keep its benchmark rate steady at 5 per cent next week.

“With the fall in monthly GDP in June and the apparent stagnation in July setting a weak foundation for the third quarter, the Canadian economy may already have fallen into a modest recession,” Stephen Brown, deputy chief North America economist at Capital Economics wrote in a note to clients.

The second quarter contraction was led by a 2.1-per-cent drop in housing investment, which included an 8.2-per-cent fall in new construction and a 4.3-per-cent fall in renovations. Statscan said these declines coincided with the Bank of Canada’s resumption of monetary policy tightening in June, after a five month pause.

Household spending slowed in the quarter, growing 0.1 per cent compared to 1.2 per cent in the previous quarter. Shoppers balked at new passenger cars, furniture and outdoor recreation gears. This was offset by a bump in spending on new trucks, vans and SUVs, which are coming to market after an improvement in auto supply chains.

“While aggregate household expenditures edged up in the second quarter, spending per capita fell 0.7 per cent. In fact, per capita household spending declined in three of the last four quarters,” Statscan noted.

Household spending has been a sticking point for the Bank of Canada, which is actively trying to reduce spending on goods and services to slow the pace of price increases. When the bank restarted interest rate hikes in June, officials called out stronger-than-expected consumer demand as a significant reason for the move.

The latest numbers, alongside sluggish retail data, suggest that Canadian shoppers are beginning to tap out.

Other drags on economic activity in the second quarter included a slowdown in business inventory accumulation, which grew at the slowest pace since the fourth quarter of 2021. Trade also weighed on GDP, with imports exceeding exports.

This is the last major piece of data before the Bank of Canada’s rate decision on Sept. 6. Other releases have generally pointed towards a cooling economy. Notably, Canada lost around 6,400 jobs in July, and the unemployment rate ticked up to 5.5 per cent.

Inflation, by contrast, is proving stubborn. Annual Consumer Price Index growth rose to 3.3 per cent in July, up from 2.8 per cent in June. There was, nonetheless, a slight fall in core measures of inflation which try to filter out volatile price moves.

“Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done,” Doug Porter, chief economist at Bank of Montreal wrote in a note to clients. “Now, the Bank of Canada just has to be patient as they wait for inflation to come their way—but that could take some time, especially with oil prices backing up again.”

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Economy

Minimum wage to hire higher-paid temporary foreign workers set to increase

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OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.

Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.

The change is scheduled to come into force on Nov. 8.

As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.

The program has also come under fire for allegations of mistreatment of workers.

A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.

In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.

The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.

According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.

The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.

Temporary foreign workers in the agriculture sector are not affected by past rule changes.

This report by The Canadian Press was first published Oct. 21, 2024.

— With files from Nojoud Al Mallees

The Canadian Press. All rights reserved.

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Economy

PBO projects deficit exceeded Liberals’ $40B pledge, economy to rebound in 2025

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OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.

However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.

The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.

Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.

The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.

The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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Economy

Statistics Canada says levels of food insecurity rose in 2022

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OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.

In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.

The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.

Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.

In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.

It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.

This report by The Canadian Press was first published Oct 16, 2024.

The Canadian Press. All rights reserved.

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