When considering the motion of objects,* Newton’s Third Law applies: for every action there is an equal and opposite reaction.

Changes in the economy are not as predictable as the motion of objects, but there is evidence showing that raising interest rates leads to slower, if not negative, growth. Past experience also points to a lag between when borrowing costs first rise and when the negative effects on growth fully materialize.

Canada is in the midst of this lagged impact. (See our Chart of the Week for a comparison of the impact of higher interest rates on the Canadian economy versus the U.S. economy.)

GDP estimates released this morning by Statistic Canada confirm that the Canadian economy struggled in February.

After a stronger-than-expected start to the year in January (+0.5%), real GDP growth in February came in at 0.2%, which is lower than the 0.3% expected by economists surveyed by Bloomberg.

The advance estimate for March is for zero growth.

Combining the surge in January with the February reading and the March estimate, Canada’s GDP grew at an annualized rate of about 2.5% in the first quarter compared to the 2.8% forecast by the Bank of Canada in its April Monetary Policy Report.** GDP per capita, meanwhile, has been falling.

Higher borrowing costs are not the only factor in play (this is one of the reasons economic laws are not as hard and fast as the laws of motion), but they are part of the reason for the weak growth.

With February and March behind us (keeping in mind the advance estimate for March will be revised), what’s next for the economy?

It depends in part on what the Bank of Canada does with regard to those higher borrowing costs. A rate cut in June or July followed by a few more cuts before the end of the year would encourage more growth. If other countries follow suit, this would help Canada by stimulating more global demand.

But, the improvement will be modest at first and things like muted growth in China and/or an escalation of the wars in the Middle East and Ukraine might pull in the other direction.

Putting it all together, our forecast is for 2024 to be another slow year for the Canadian economy with (assuming those interest rate cuts come to pass) things improving over the second half and returning to a more normal rate of GDP growth in 2025.

Until then, the “soft landing” (i.e. no recession) will still be a significant setback for the Canadian economy with many households and businesses waiting anxiously for things to take off once again.

*At least when they are not moving extremely fast or if they are extremely small. You will need to refer to Einstein and quantum theory for those cases.

**The monthly GDP numbers are subject to revision and are calculated on a different basis than expenditure-based quarterly GDP, but provide an approximation.

Answer to the previous trivia question: The Canadian Federation of Independent Business was founded in 1971.

Today’s trivia question: How many electric cars (including plug-in hybrids) were sold globally in 2023?