An Uptick in Economic Activity in January as Sectors Rebound

Key Insights

It is clear now that Canada’s economy is slowing. Real gross domestic product growth decelerated at the end of 2022 and will likely slow further before improving as the full effects of higher interest rates emerge. Consumer spending will continue to be hit in the coming months. The recent banking crisis observed in the United States and Europe, from which Canadian banks have so far been insulated, has increased uncertainty in financial markets. Decisive action by the Federal Reserve and other monetary authorities has ensured that the baking crisis has so far been contained. Many economists however see this as a potential slow-moving ball. One thing for sure is that the stress in the banking system will weigh on credit growth, which may in turn reduce real GDP growth in the coming months.

The recent decision by the United States Federal Reserve Bank to increase interest rates by a quarter point reflects a slight change in course compared to its Canadian counterparts. With the Bank of Canada halting rate increases earlier in March, the Federal Reserve has not yet signaled an end to the rate hikes. Inflation appears to be moderating but it still is too high for comfort especially as wage gains remain persistent. A concern for the Bank of Canada is that the difference in interest rates will cause capital to move from Canada to the U.S., putting downward pressure on the loonie. This erodes importer purchasing power and can stoke higher inflation. So far, this concern is limited, but combine an evolving banking crisis, strong wage-gains, and geo-political instability, central banks still have their work cut out for them.

Amid war continuing in Europe, it is clear the world is pivoting towards competing regional blocks. While goods and services continue to move across borders at levels higher than previous decades, the trend since the COVID-19 pandemic has been slowing globalization and increasing protectionism. Supply chains are being assessed and specific sectors are receiving support based on national security concerns. It remains to be seen how this competing vision for the global economy plays out, but one potential impact is inflation may remain elevated over the medium term. Canadian policy makers and businesses will need to adapt to a world of rising protectionism as well as resource and industrial nationalism.