Canada’s lagging economy is being buoyed by surging population growth but little else, according to new research from The Conference Board of Canada. After a slight decline in real GDP in the second quarter of this year, we are forecasting two more quarters of decline followed by only a slight rebound in the first quarter of 2024. Overall, Canada will see a real GDP increase of just 0.9 per cent in 2023 and a further 0.6 per cent in 2024.

“Consumer spending has slowed dramatically, and we’re seeing a more pronounced decrease among those who are more heavily mortgaged,” according to Ted Mallett, Director of Economic Forecasting at The Conference Board of Canada. “We anticipate Canadian consumers will be in for a rough ride as a result of higher borrowing costs, with mortgage interest taking an additional two per cent share of disposable income in less than 18 months.”

Canada’s labour market is cooling, a scenario that has taken time to develop in part due to the cushioning effect of high job vacancy rates and resilient consumer spending supported by excess savings. However, these buffers are fading, paving the way for stronger transmission of monetary policy to the labour market. Despite some downward stickiness, wage growth is forecast to decelerate further over the coming quarters driven by expanding labour supply and weakening labour demand.

Real household spending growth fell flat in the second quarter of 2023, and without the support of atypically strong population growth, spending would have been weaker still. Consumer outlays on discretionary goods and services, including accommodation services and international spending declined, suggesting that pent-up demand is folding under the strain of higher interest rates and elevated price growth. In the near term, consumer price growth will remain above the Bank of Canada’s target.

Housing affordability and availability are top-of-mind for many Canadians and politicians are noticing. At the highest level, housing issues could become the “ballot question” in the next federal election, although this remains about two years away. The federal government is finally weighing in with an elimination of GST on purpose-built rental housing construction, while provincial politicians are offering their own solutions. All told, new home delivery appears challenging in the face of burgeoning national residential needs.

Government finances in Canada remain problematic as they enter a post-COVID stimulus phase of decision making. With the money going towards fighting inflation nearing an end, governments have turned to more structural issues in the economy, notably building houses and supporting capital investment.

A strong point for the global economy is that headline inflation has peaked in most major economies as supply shocks linked to the pandemic and war in Ukraine have subsided. Global GDP growth is anticipated to be 2.3 per cent in 2023. Downside risks to the global outlook revolve around the inflation and interest rate outlook. The Conference Board of Canada’s baseline view is that the world’s major central banks won’t have to increase interest rates significantly higher than current levels.

The U.S. economy continues to outperform expectations despite highly restrictive monetary policy. The impacts of eleven aggressive interest rate hikes since March 2022 are materializing. While still above target, inflation is trending in the right direction. The Conference Board of Canada forecasts U.S. economic growth will slow down in the first half of next year, but the economy will avoid slipping into a recession as real GDP is expected to increase by 2.1 per cent this year and 1.2 per cent in 2024.

About The Conference Board of Canada

The Conference Board of Canada is the country’s leading independent research organization. Since 1954, The Conference Board of Canada has been providing research that supports evidence-based decision making to solve Canada’s toughest problems.