Rear view of traffic jam with breaklights showing

High inflation and rising interest rates are starting to take their toll on the economy, according to the latest reading from Bank of Montreal’s Canadian business activity index.

The index — which reflects data from 10 monthly indicators, along with high-frequency data on retail mobility and internal credit card transaction data — declined by 0.4% for July, reversing a 0.3% gain in June, BMO reported.

The latest reading “suggests that the economy went in reverse to start the third quarter,” the bank said in a research note.

“The slowdown in activity was broad-based, with all 10 sub-indicators weakening in July,” it said. “The most abrupt changes over the past few months have been the erosion of small business confidence and the sudden slowing of the housing market.”

Small business confidence is suffering amid inflation and labour shortages, which are “challenging cash flows and limiting growth potential,” the report said.

The Canadian Federation of Independent Business said last week that small business confidence edged up in August, remaining “stable but low.”

BMO also noted that rising interest rates have chilled the housing market, and said it expects wholesale, retail and manufacturing volumes “to weaken given the StatCan flash estimates all pointing to declining nominal sales.”

While there are bright spots, including strong services spending and a recovery for equity prices, BMO said the Canadian economy is “sending early signs of slowing as rising interest rates and inflation start to take a bite out of real spending.”

It added: “The latter months of the summer are likely to show further weakness, despite some gas still left in the tank from the rotation back to in-person services and pent-up savings.”