February Forecast Update

Canadian Economics

By: CBoC Economics Team

  • In response to surprisingly strong employment growth in December and January, we are providing a mid-cycle update, increasing our GDP growth forecast slightly for 2023 while trimming our outlook for 2024 in kind. We are now expecting the economy to grow 0.9 per cent this year, rather than 0.6 per cent identified in our December forecast. Conversely, we now expect 2.0 growth for the year in 2024, down from our earlier estimate of 2.3 per cent.
  • Canada’s economy created 176,000 jobs over the last four months of 2022, and started this year with an additional 150,000 jobs in January, bringing the number of employed in Canada to above 20 million for the first time. The exceptional start to the year resulted in a solid upward revision to job growth—we’re now calling for a 2.5 per cent gain in 2023.
  • Hiring is being facilitated by a sharp turn around in the number of international arrivals helping to fill massive job vacancies. The number of net non-permanent and permanent residents coming to Canada topped 765,000 from January to September last year—we may well see close to 1 million new arrivals when data for 2022 is complete.
  • We still expect the Bank of Canada to hold its policy rate at its current 4.50 per cent level, but they won’t see room to start moving it toward more neutral territory until 2024.

Key Insights

  • We are issuing a mid-cycle update of our quarterly national forecast, in part to give guidance to Finance Canada as they prepare economic assumptions for the next Federal Budget.
  • Our base analysis shows the path of growth remains the same—that the economy will slow to a near stall in the early- to mid-part of 2023 and that inflation will continue to ease throughout the year.
  • The slowdown will hit businesses harder as we expect much weaker inventory build will ease demand through the supply chain for merchandise—affecting trade, transportation, and manufacturing.
  • Households should get by relatively unscathed as stronger-than-expected employment and population growth will support incomes and stronger consumer spending this year—we expect aggregate household savings to remain at historically high levels in 2023.
  • A hot job market is leading to questions about whether the Bank of Canada’s interest rate tightening is enough to sustain progress on the price-fighting front. Our view is that strong employment growth may in fact help deal with domestic inflationary pressures since the job gains are filling gaps and increasing output. If the strong inflows of international arrivals continue to add to the labour force, this will help employers meet excess demand while at the same time taking pressure off of wages.
  • Thus, current monetary policy with existing rates is sufficient to get the job done to curtail inflation, but the margin of error has narrowed. The risk is in the Bank of Canada’s efforts being undermined by loose fiscal policy. It will be even more important to keep the federal and provincial governments’ spending impulses in check.
  • Once 2023 comes to an end, we expect conditions to improve. Growth will tick up slightly in 2024 as the economy regains some of its lost inertia and borrowing costs begin to ease.
  • This is an interim forecast based on the information available as at mid-February. We will update our full quarterly forecast when the National Accounts for Q4 2022 are released at the end of this month.