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The Canadian economy may have entered a technical recession as high interest rates weigh on consumer spending, preliminary data from Statistics Canada suggests.

The federal agency released its August gross domestic product report on Tuesday, which shows the Canadian economy remained flat in the month. Meanwhile, a preliminary estimate is tracking a small contraction in the third quarter.

The weaker-than-expected data is reinforcing forecasters’ expectation that the Bank of Canada is done raising interest rates and sparking recession chatter.

“I don’t think they are going to hike interest rates again, given how weak the economy is,” said Andrew Grantham, CIBC’s executive director of economics.

August marked the second consecutive month where growth remained flat, and early data suggests the economy continued that trend in September.

For the third quarter, Statistics Canada’s preliminary estimate suggested the economy shrank at an annualized rate of 0.1%, which would follow a contraction in the second quarter.

A technical recession is defined as two consecutive quarters of negative growth, but economists generally look for broader-based weakness to qualify a downturn as a recession.

“The declines are still very small,” said Nathan Janzen, assistant chief economist at RBC.

Grantham says it’s clear Canada is “skirting a recession.”

“The economy is very weak, we are stalling at a time where we haven’t really felt the biggest impact yet of some of these past interest rate hikes,” Grantham said.

At the same time, he cautioned against reading too much into the estimate, noting it could be revised up when the final data is released.

A recession is often associated with layoffs and a rise in unemployment as business conditions worsen. Grantham says CIBC expects the job growth to be sluggish and to trail population growth. However, layoffs have been uneven across sectors so far, he said.

“What’s different from this situation compared to more typical recessions is that we are seeing layoffs in some sectors, but there are still other areas of the economy that are trying to rehire and get back to their full capacity, because they weren’t able to do that after the pandemic because of labour shortages,” he said.

“So what we’re seeing more so than big layoffs and a rise in the unemployment rate, is maybe that the quality of employment is changing. Maybe some of the higher-paying industries are letting people go, but there are lower-paying sectors that are still trying to hire, so that protects us to a certain extent.”

The report said eight out of 20 industries grew in August, while growth in services-producing sectors was offset by goods-producing sectors.

The report says higher interest rates, inflation, forest fires and drought conditions continued to weigh on the economy.

Grantham says the effect of natural disasters and weather events on growth is a reminder that climate change can feed into inflation because of supply disruptions.

“It is a supply constraint; it holds back economic activity. But at the same time, that’s not necessarily a restraint in economic activity that helps get inflation under control. Actually, quite the opposite. It tends to add to inflation,” Grantham said.

The details in the GDP report offer more evidence of interest rates working to slow the economy, as consumer-sensitive sectors such as retail take a hit, even as the population grows rapidly.

“The fact that you’re seeing activity in those sectors soften, despite population growth, is more evidence that higher interest rates are starting to have a more significant impact on per person household spending behaviour,” Janzen said.

Industries such as agriculture and forestry, manufacturing, retail and accommodation and food services shrank.

Among the industries that experienced growth are wholesale trade and mining, quarrying, oil and gas extraction.

The Bank of Canada opted to hold its key interest rate steady at 5% at its last two decision meetings. Janzen said Tuesday’s release solidifies this decision.

“This makes it more likely that they won’t hike interest rates again,” he said.

High interest rates are expected to continue dampening growth in the economy, particularly as more households renew their mortgages at higher rates.

A recent forecast from the Bank of Canada suggests economic growth will remain weak for the rest of the year, and into 2024.

The pullback in spending caused by higher borrowing costs is supposed to help cool high inflation, which was sitting at 3.8% in September.

The Bank of Canada expects annual inflation will return to the 2% target in 2025.