A Small Decline in December, as the Year Ends in Economic Deceleration

Canadian Economics

By: Liam Daly

  • Canadian real industry GDP slipped down by 0.1 per cent in December. The data show that in the fourth quarter of 2022, Canadian industry GDP growth decelerated to 0.2 per cent, the slowest pace since the second quart of 2020. Annual real GDP growth for 2022 was therefore 3.6 per cent.
  • In December, output rose in 12 of 20 industrial sectors, nevertheless overall output declined. In the goods economy, a large contraction in mining, quarrying, and oil and gas extraction (–4.0 per cent) outweighed modest gains in construction, manufacturing and utilities. Meanwhile, across the services economy, growth in retail trade and the public sector was offset by declines in wholesale trade and transportation and warehousing.
  • Despite higher interest rates, household spending rose. Purchases of durable goods increased by 3.4 per cent as supply chains improved and auto manufacturers were able to meet demand. Meanwhile, investment in housing fell for the third consecutive quarter. On the trade side, a reduction in imports combined with higher exports of food products and travel services improved Canada’s trade balance.
  • Elevated wage growth and robust employment gains in the final months of the year allowed employees’ compensation to rise. This supported growth in household disposable income which increased at almost the double the rate of household spending. As a result, the saving rate increased, rising to 6.0 per cent in the fourth quarter.

Key Insights

Today’s releases of industry GDP and income and expenditure data complete the Canadian GDP portrait for 2022. As the public health emergency subsided, resurgent demand, hampered supply chains and conflict in Europe drove inflation to levels not seen for decades. Interest rates are gradually taking effect on the Canadian economy, and we forecast inflation to fall sharply over the first half of 2023 as demand cools, supply chains improve and higher immigration helps to ease labour supply pressures. The labour market started 2023 with a bang, adding 150,000 new jobs in January. This bodes well for household incomes and tax revenues and ultimately the prospect of bringing inflation back to target while minimizing the size of the economic downturn.

Meanwhile, conditions in the global environment have grown increasingly stormy. With no end in sight, the war in Ukraine is set to dominate the geopolitical landscape over the next year and continues to threaten energy and food markets. In the Middle East, a recent upswell in conflict between Israelis and Palestinians is feeding regional tensions. And the appearance of Chinese spy balloons in North America has served to cool already frosty relationships between the world’s two largest economies. Against this backdrop, security and trade alliances with other Western nations look set to become increasingly important. Yet, even among allies, Canada will also need to adapt to the rising risks of protectionism and resource nationalism.

Faced with the growing pressures of an ageing population, Canada’s principal response is higher immigration. Besides record targets for permanent residents, admissions of non-permanent residents, including international students and temporary foreign workers, are also rising. High levels of international migration to Canada will drive up demand for infrastructure and housing. However, with interest rates cuts seemingly a long way off, higher borrowing costs and moderating house prices are disincentivizing housing investment at precisely the moment when more homes are needed to accommodate more newcomers. In many parts of Canada, housing affordability is already very low. Without a clear plan to address the squeeze on housing supply, the crisis of affordability and availability will only worsen.