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Recession Averted and Signs of Economic Resilience

Canadian Economics

By: Viktor Cicman

  • Canadian real industry GDP was essentially unchanged in December while the preliminary estimate for January indicates growth of 0.4 per cent. With the final month in, GDP rose by 1.0 per cent on an annualized basis in the fourth quarter, indicating that while Canada’s economic performance has slowed, it is at least still expanding.
  • Exports helped push up real GDP growth in the fourth quarter, as exports of goods and services rose 1.4 per cent. The increase was driven by sustained production of crude oil in Alberta, as crude oil and crude bitumen exports rose by 6.2 per cent. Exports had a good year overall, rising by 5.7 per cent. Growth was led by increased exports of passenger cars and light trucks as well as travel services.
  • Household consumption remained resilient in the fourth quarter, as spending edged up. The increase was led by higher spending on new trucks, vans and utility vehicles as supply chain issues continued to ease and back orders were fulfilled. Household spending in Canada still remains sluggish, especially when population gains are considered, but any increase with high interest rates can be taken positively.
  • Compensation of employees rose 0.8 per cent in the fourth quarter, the slowest growth rate since the second quarter of 2020. A welcome sign for the Bank of Canada’s attempt to fight inflation, especially as slower wage growth in services producing industries was the main contributor.
  • In December, output rose in14 of 20 industrial sectors. Goods-producing industries contracted 0.2 per cent in the month behind a weak performance in the utilities, construction and manufacturing industries. Output in service-producing sectors was unchanged as the Quebec public sector workers’ strike weakened output.
  • A trend that has plagued Canada’s economy continued in the fourth quarter, as real business investment declined. In fact, real business investment declined for the sixth time over the last seven quarters. Leading the drop was investment in non-residential structures, which fell 3.0 per cent in the fourth quarter, owing to decreased expenditure on engineering structures.

Key Insights

Today’s GDP estimates show that Canada’s economy finished the year stronger than expected, with real GDP increasing by 1.0 percent (annualized growth) in the final quarter. With the final quarter of the year in, Canada’s economy grew by just 1.1 per cent in 2023, a clear sign that high interest rates are doing their job to slow the economy, even with strong population growth.

The good news is that a technical recession has been avoided. Interest rates have likely reached their peak with now inflation coming down. Consumer price growth in January slowed 2.9 per cent year-over-year, within the Bank of Canada target range. However, average hourly wage growth for permanent employees is still running a little hot at 5.3 per cent, and service prices remain firm. Nonetheless, with Canada’s economy slowing in 2023, and inflation showing steady downward progress, rate cuts are expected later this year. Once rates move lower, the economy should pick up, making it easier for both businesses and consumers’ pocketbooks.

Looking to the south of the border, in the US economy, inflation is running higher than expected. In January consumer price growth increased 0.3 per cent month-to-month, after gaining 0.2 per cent in December. Other indicators such as wages, employment growth, and retail spending are still not easing as much as policymakers are hoping for. This will likely lead to interest rates staying higher for longer, but rate cuts are still expected later this year. Importantly for Canada, with the US being its largest trading partner, a resilient US economy will help buoy Canada’s economy during the current slowdown.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit The Conference Board of Canada’s Canadian Outlook.

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