The bad economic times have only just started

The Canadian economy is headed for a rough patch. Growth has already slowed considerably. Job growth has moderated. Inflation remains stubbornly high. But the pain households are feeling today is only going to get worse.

"The path forward looks bleak," Tiago Figueiredo, a macro strategy associate with Desjardins, said in a note.

For a while there, the economy proved more resilient than expected. The Bank of Canada's interest rate hikes piled up one after another. Even so, the jobs market boomed, GDP continued to expand.

But economic pain was inevitable. Soaring inflation has eroded purchasing power, and climbing interest rates have clobbered households. Now, cracks have begun to appear in the data, and economists expect those cracks to grow. GDP contracted in the second quarter of this year.

Next week, new data are expected to show economic growth flat-lined in July and perhaps contracted again in August. Some of that can be chalked up to specific factors, such as the port strike including labour actions like the port strike in B.C. or wildfires.

But before any of that, momentum was clearing being sapped out of the Canadian economy.

That would put Canada on track for two consecutive quarters of negative growth, which would meet the technical definition of a recession.

Frances Donald, the global chief economist and strategist at Manulife Investment Management, says we should spend less time debating what to call this downturn and focus more on how it will impact people.

"Even if there are technical factors that avert two quarters of negative GDP, this economy will feel like a recession to most Canadians, for the next year," she told CBC News.

Experts say there are several factors masking just how bad the economy really is. The first is that it usually takes about a year and a half for the full impact of interest rate changes to get absorbed into the economy. 

The Bank of Canada began its rate-hiking cycle 17 months ago. That means the impact of the fastest, most aggressive interest rate hiking cycle in Canadian history is still to come. 

Second, consumption patterns changed during the pandemic and haven't fully reverted to normal, predictable ways that make economic modelling easier. During pandemic lockdowns, Canadians bought a lot of "stuff." We snatched up electronics, gym equipment, household wares. Now, those same households are primarily spending on experiences. 

So, retail sales figures just released show an uptick in July, but a slowdown in August. How much of that is seasonal or cyclical isn't as easy to determine when all these other factors are pushing and pulling consumers in different directions.

"Discretionary consumer spending is getting held back by inflation and surging borrowing costs. Another sign of sluggish growth for the Canadian economy while the Bank of Canada, at the same time, grapples with above-target inflation," Robert Kavcic, senior economist at BMO, wrote in a note to clients.