Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023.
The jobless rate will rise next year but to less severe levels than in previous downturns.
Though higher rates will restrict growth, they’re necessary to tame inflation and cool an overheating economy.
Household spending that accelerated out of pandemic lockdowns will slow as higher prices, interest rates and unemployment hit households.
The bottom line: This recession will be moderate and short-lived by historical standards—and can be reversed once inflation settles enough for central banks to lower rates.
In Canada, economic pressures are closing in
When you’re at the top of the hill the only way to go is down. Canada’s economic growth has fired on all cylinders following pandemic shutdowns. But a historic labour squeeze, soaring food and energy prices and rising interest rates are now closing in. Those pressures will likely push the economy into a moderate contraction in 2023.
Canadians continue to fuel a recovery in the travel and hospitality sectors. And higher global commodity prices have boosted the mining sector. But businesses are struggling to find the workers they need to expand production. There were nearly 70% more job openings in June than before the pandemic—and those hunting for staff were forced to compete for almost 9% fewer unemployed workers. Meantime, soaring prices are cutting into Canadians’ purchasing power at the pump and the grocery store.
This recession won’t be as severe as prior downturns
Both in Canada and abroad, central banks are aggressively hiking rates to slow household demand and fight inflation. In Canada, much of the price pressure is coming from beyond our borders, as energy and agricultural prices surge on supply chain snarls stemming partly from the Ukraine war.
Strong domestic demand for housing and services has intensified these pressures and the labour crunch is driving wages higher. The Canadian unemployment rate is now almost a full percentage point below RBC’s assumption of its longer-run neutral (non-inflationary) level. As the economic contraction plays out next year, that rate will likely rise another 1 ½ percentage points to 6.6%.
These job losses will come at a time when Canadians are already grappling with higher prices and debt servicing costs (factors that have hit lower income households the hardest). Still, by historical standards, we expect the slowdown to be modest. Indeed, a 6.6% unemployment rate would still be more than 2 percentage points below the 8.7% peak in the 2008/09 recession.
Higher rates are key to reining in inflation expectations
Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act. Inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations. Higher inflation expectations can become self-fulfilling, making businesses more likely to pass on cost increases and consumers more willing to pay for them (and demand higher wages). A scenario in which Canadians believe inflation will run well past the bank’s target range of 1 to 3% could upend almost three decades of exceptionally effective inflation targeting policy. It could also require much larger and more damaging interest rate hikes to re-anchor prices.
Higher 5-year inflation expectations drove the U.S. Fed’s decision to hike rates by 75 basis points in June. With the BoC confronting a similar increase, a hike at least as large is likely in Canada on July 13th. And neither bank is done. The U.S. Fed and the BoC are expected to lift rates to 3.5% and 3.25% respectively, by the end of 2022. That’s high enough to significantly restrict growth, particularly in Canada, where household debt is very high.
Slowing growth abroad will spill over into Canada
Even without rate hikes, labour shortages in Canada and abroad are preventing expansion. The U.S. economy contracted in Q1 and though we’re tracking a small increase in Q2, it wouldn’t take a major forecast miss to have a second quarter of negative growth. We expect the U.S. unemployment rate to rise to 4% by year’s end and climb to almost 5% in 2023. Meantime, emerging markets will struggle with higher food and energy prices, elevated borrowing costs and a strong U.S. dollar. And pandemic disruptions continue to curb growth in China.
These slowdowns in external demand will drag on Canadian growth.
The boom in household spending will flag later this year
Canadian households have socked away over $300 billion in savings since the end of 2019. That’s boosting spending—and adding more inflation pressure.
But the lion’s share of savings remain with higher income households, leaving lower income groups more vulnerable to rising rates and prices. Housing markets have softened dramatically, with prices swinging from record highs over the winter to declines in the spring. We expect house prices to fall 10% in the year ahead, subtracting over $800 billion from household net worth.
That would only partially retrace the $2.4 trillion surge in real estate equity since 2019. Still, it will leave Canadians feeling “less wealthy” prompting them to spend less in the housing market and elsewhere.
Rate hikes will reverse but not until inflation cools
Global inflation pressures may soon peak. Shipping costs have declined. And exceptionally strong demand for goods—which has sparked supply chain challenges and higher input costs—is moderating as consumers in Canada and abroad shift spending to services that weren’t available during pandemic lockdowns. Much of the surge in wheat prices following Russia’s invasion of Ukraine has reversed.
Prices are still rising too fast and inflation won’t slow sustainably until demand falls. But once that happens, central banks will ease interest rates again. Meantime, a slowdown both in Canada and abroad will help temper inflation. A 6.6% unemployment rate in Canada next year wouldn’t be far above long-run ‘full-employment’ levels. We don’t think it’ll take long to unwind that weakness in 2024 and beyond.
View the RBC Economics forecasts for Canada and the U.S.
Nathan Janzen is a member of the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.
Claire Fan is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators on GDP, labour markets as well as inflation for both Canada and the US.
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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
