Canada’s economy stalled in July as previous rate hikes took hold. The economy of Canada came to a standstill in July and inched up marginally in August, according to statistics released on Friday. This highlights a recent slow performance that caused markets to reduce their wagers on another interest rate rise the following month.

According to Statistics Canada, growth came to a complete end in the month of July as the manufacturing sector reported its worst drop in output in more than two years. However, it is expected to have increased by 0.1% in August.

Following a month-over-month decrease of 0.2% in June, market analysts surveyed by Reuters projected a monthly increase of 0.1% for July. As a result of the Bank of Canada’s decision to increase interest rates ten times since the beginning of the previous year, the economy is showing signs of weakness.

According to Royce Mendes, head of macro strategy at Desjardins Group, “the economic data… continue to paint a picture of an economy that has stalled,” as the company said in a note. “That should give central bankers confidence that their medicine is slowly working,” the author writes.

On September 6, the central bank kept its benchmark overnight interest rate at 5% even though the economy had entered a sluggish growth phase. However, the bank did warn that it may increase the rate once again if inflation got stuck long beyond its objective of 2%.

The revelation of the GDP statistics caused the money markets to reduce their odds of a rate rise occurring the next month from 31% to 27%. Before the release of the GDP figures, the odds were at 31%.

According to Robert Kavcic, senior economist at BMO Economics, “Canada is really struggling to grow right now… (this) argues for (the bank) to remain on hold and lean on the tightening that has already been put in place.”

As the greenback gave up some of its recent gains versus a basket of other currencies, the Canadian dollar traded 0.4% higher at 1.3434 per United States dollar, equivalent to 74.44 cents in U.S. currency.

In the second quarter, the economy unexpectedly shrank at an annualized pace of 0.2%, much lower than the Bank of Canada’s prediction of an annualized gain of 1.5%.

According to Andrew Grantham, senior economist at CIBC Capital Markets, “The third quarter as a whole is tracking growth of a little less than 0.5% annualized, which is a very muted rebound following the second quarter’s surprise decline.”

The overall number of jobs in the service-producing sector increased by 0.1% in July, while the number of jobs in the goods-producing sector decreased by 0.3%.

In June, the manufacturing sector had a contraction of 1.5%, the largest month-on-month drop seen since April 2021. This decline was mostly attributable to businesses drawing down their inventory.

Some of the industries that were impacted by wildfires in June recovered in July. The mining and quarrying industry, excluding oil and gas, saw a 4.2% increase, while the accommodation and food services industry increased by 2.3%.