Fight on Inflation, Flattens Canada’s Economy

Ottawa, January 16, 2024 —Canada remains at an economic standstill as high interest rates bite into business and consumer spending power, according to new research from The Conference Board of Canada. The country’s real GDP is forecast to increase by just 0.6 per cent in 2024.

“Inflation has and should continue to moderate, but we’re unlikely to see drastic rate relief from the Bank of Canada until mid-year,” according to Ted Mallett, Director, Economic Forecasting at The Conference Board of Canada. “Once they kick in, the growth outlook in 2025 is a much brighter 2.3 per cent.”

Canada’s housing sector is bound by conflicting forces, as population pressures are requiring significant increases in building activity but high costs and elevated lending rates, among other factors, are disincentivizing it at the same time. There have been hopeful policy changes at all three levels of government, but it is not enough and not well coordinated. Furthermore, it will take years for these to work through the marketplace.

South of the border, the United States economy continues to defy expectations, with Q3 GDP increasing 5.2 per cent annualized, driven mainly by a jump in consumer spending. While wage growth remains elevated and still has more cooling to do, encouraging progress made on lowering inflation has been enough to allow the Federal Reserve to halt any further rate hikes. The Conference Board of Canada’s baseline view is that U.S. economic growth will slow down in the first half of 2024, but the economy will avoid slipping into a recession.

Resilience in the U.S. greatly benefited Canada’s international trade sector in 2023, but that influence is expected to moderate in 2024. With exports outpacing imports throughout the forecast period, the trade sector will contribute positively to real GDP growth over the next five years.

The slowing national economy has cooled the labour market. The Conference Board of Canada anticipates employment growth to remain muted in the first half of 2024, particularly in the private sector. With most international migrants of working age, the strong inflows of temporary and permanent residents are feeding labour force growth. We expect labour force growth to outpace employment growth over much of 2024, resulting in a further rise in the unemployment rate.

Business investment in Canada has similarly been challenged by high borrowing costs. Capital investment in the oil patch will continue, but not at pre-pandemic norms. The yardsticks are moving on the energy transition and post-COVID business patterns, but it is too early to see how they will settle into a sustainable rate of investment. With often fractious intergovernmental disagreements and a federal election on the horizon, the prospect of pendulum shifts in major policies add to business investment risk.