Quick take

Imperilled by Inflation, COVID-19 and Conflict, the Economic Recovery Continues

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  • Canadian real GDP growth held steady in December, ending six consecutive months of growth.
  • Overall, the economy expanded by 1.6 per cent in the final quarter of 2021 and 4.9 per cent in 2021. To put this in perspective, real GDP remains roughly 0.5 per cent below that recorded in 2019, a testament to the economic cost of the pandemic.
  • In December, there was notable growth in agriculture, forestry, fishing and hunting (+4.6 per cent). However, this was more than offset by declines in retail trade (–2.7 per cent) and mining, quarrying, and oil and gas extraction (–2.2 per cent). In response to tightening public health measures, output declined in accommodation and food services (–1.5 per cent) as well as arts entertainment and recreation (–3.8 per cent).
  • Falling government transfers to households pushed down fourth-quarter disposable income by 1.3 per cent. The household savings rate continued to decline, reaching 6.4 per cent as fewer restrictions offered Canadians greater freedom to spend. Spending on services increased, outweighing weaker spending on non-durable and semi-durable goods.

Key insights:

  1. December concludes a volatile year for the Canadian economy. Despite multiple pandemic waves and extreme climate events, Canada added over 850,000 jobs and administered over 70 million vaccine doses. Growth in 2021 was increasingly broad-based, of the 20 industrial sectors, activity was up in 17. Although several thorny challenges have emerged, including inflation, supply chain disruptions, and labour market friction, the latest GDP numbers portray an economy in recovery. Among households, saving and consumption patterns are gradually returning to normal, while across industries, the unevenness in the recovery is diminishing. But the latest results do not capture the full impact of the Omicron variant. Although relatively short and sharp, this latest wave of the pandemic will undoubtedly weaken GDP growth over the next couple of months.
  2. The invasion of Ukraine by Russia has many important implications for the Canadian economy. At this stage, the myriad of moving parts means that the situation is fraught with uncertainty. Still, there has already been significant disruption to commodity, energy and financial markets, as well as a growing outflux of refugees. For Canadian consumers, the economic cost of the conflict will be borne out through higher energy and food prices. This comes at a time when households were already contending with the highest level of inflation in decades. At the same time, the conflict has pushed up prices for several of Canada’s exports, including farming, mining and energy products. This will likely lead to an improvement in Canada’s terms of trade. Overall, the impact of higher prices on households is likely to outweigh the narrower gains for exporters.
  3. The Bank of Canada will announce its latest decision on interest rates this week. The Bank is widely expected to raise the overnight rate in an effort to tackle rampant inflation. Inflationary pressure arising from the Ukraine crisis adds further complexity to the decision of how quickly and aggressively to raise rates. Higher interest rates mean higher borrowing costs, an important factor for prospective home buyers. Surging housing prices have created a crisis of affordability in many regions of the country. Rising interest rates may help to gradually cool housing demand, though in the short term, they may spur a rush-to-buy among buyers wary of higher future mortgage costs.

Russian Invasion of Ukraine: Access the latest insights

Liam Daly

Liam Daly


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