A flash estimate for the Canadian economy in June is showing signs of a slowdown, something economists are attributing to the Bank of Canada’s series of steep interest rate hikes.

While the economy gained 0.3 per cent in May on a month-over-month basis, a lookahead to June revealed a 0.2 per cent contraction, the data released from Statistics Canada on Friday showed. 

“Maybe a little bit of softness (is) starting to creep into the economy,” Robert Kavcic, senior economist at BMO Capital Markets, told BNN Bloomberg in a TV interview on Friday. 
 
The forecasted June weakness is showing up in all key economic data points, he added. 
 
“We’re seeing it in areas like housing, we’re seeing it in areas like consumer spending – where spending volumes at the retail level have really flattened out even though we are seeing very strong demographic and population flows, and business investment has been little sluggish and choppy as well,” Kavcic said. 
 
He attributed the pressure to the Bank of Canada’s aggressive monetary policy measures. 
 
“I think bigger picture is, we’re kind of starting to see some evidence that almost 500 basis points of tightening compressed in a very short window of time is starting to have an impact on the economy more broadly,” he said. 
 
Kavcic believes the central bank will continue to keep interest rates elevated at least until the end of the year as they are proving to be effective. 
 
“The downturn is suggesting that policy seems to be tight enough to be slowing the gears on the economy, he added. 

Jean-François Perrault, senior vice-president and chief economist at Scotiabank, also attributed the slowdown to the Bank of Canada’s rate-hiking cycle.
 
“There’s no question that things are slowing, and of course likely slowing because of what the Bank of Canada has done — now we’re not seeing overwhelming evidence that things are slamming shut,” Perrault told BNN Bloomberg in a television interview on Friday. 
 
Perrault explained that as Canadians are forced to pay more for debt, it’s taken their spending power away from other expenditures. 
 
“Central banks have been trying to engineer a slowdown for some time, so perhaps this is the beginning of that occurring,” he added. 
 
WHAT DOES IT MEAN FOR THE BANK OF CANADA?
 
Kavcic said he believes the central bank will continue to keep interest rates elevated at least until the end of the year as they are proving to be effective. 
 
“The downturn is suggesting that policy seems to be tight enough to be slowing the gears on the economy, he added. 
 
Desjardins Economist Marc Desormeaux thinks the Bank of Canada is likely to hold rates steady — at least during its next meeting. 
 
“May and June (GDP) numbers suggest the Canadian economy is slowing and reinforce our view that the Bank of Canada will hold rates in September given the recent emphasis on balancing the risks of over and under tightening policy,” he wrote in a note on Friday. 
 
Desormeaux is also calling for economic growth to come in slightly weaker than forecasted in July. 
 
Perrault noted that as the Canadian economy continues to slow, the conversation around easing monetary policy will eventually resurface.
 
“This is very much an environment where bad news on the economic side is actually good news for a rate perspective,” he said.