A second-quarter slowdown of the Canadian economy is proof that the Bank of Canada’s interest rate hikes are effectively working their way through the system, economists said Friday. 
Canada’s gross domestic product (GDP) shrank at a 0.2 per cent annualized pace in the second quarter of 2023, according to the latest data from Statistics Canada.
The data released Friday was weaker than what economists had forecasted and pointed to an overall cooling of the country’s economy as spending and residential investment receded, while corporate profits continued to decline. 

“We are seeing the Bank of Canada getting some traction here with those rate hikes,” Dawn Desjardins, chief economist at Deloitte Canada, told BNN Bloomberg in a television interview. 

She explained that Canadians have likely come to terms with the fact that higher interest rates are causing them to use their disposable income towards paying their bills, and they are therefore becoming more cautious with their spending.
The surprise weakness in the data came from residential investment, Desjardins noted. 
“Most of us were anticipating that we’d see positive on the housing situation, but that was weaker,” she said, also noting that consumer spending pulled back from “robust gains” seen earlier the year. 
The cooldown in GDP could give Canada’s central bank a reason to hold off on another hike at its rate decision scheduled for next week on Sept. 6.
“It does give the Bank of Canada room to just step back,” Desjardins said. 
Another expert who spoke with BNN Bloomberg agreed with Desjardins’ view. 
“I do believe they are done with their hiking,” Stéfane Marion, chief economist at the National Bank of Canada, said in a television interview. 
The rapid interest rate increases from the central bank over the past year and a half have been enough to slow spending, he said.
“What we’re seeing this quarter is consumers are reducing their pace of consumption and they’re growing their savings rate in anticipation that in coming quarters, they will need to have to be prepared for a payment shock,” he added. 
One theme that Marion flagged was a drop in corporate profits -- which he believes will lead to labour market weakness in the months ahead, and drag overall GDP further down. 
"Without corporate profits, you don't have job creation, so with four consecutive declines it does suggest weaker labour markets in the months ahead,” he said. “Profits are a key driver of job creation, not the other way around.” 
Should the slowdown continue, Marion said he expects the Bank of Canada to reverse course in 2024. 
“I do believe there will be rate cuts, but that’s a story for next year,” he said.