The Conference Board of Canada’s latest Canadian outlook calls for economic output to slow to a near standstill over the next three quarters. Real GDP growth of just 1.2 per cent is forecast for 2023, followed by a modest rebound of 2.7 per cent for 2024. This follows an estimated 3.0 per cent gain in 2022, as remaining pandemic restrictions were lifted and households regained more normal consumption patterns.

“The main forces impacting Canada’s economic outlook have been largely unchanged over the past several months, but the crosscurrents have become more intense,” said Ted Mallett, Director, Economic Forecasting at The Conference Board of Canada. “The outcome hinges on central banks’ deliberate efforts to slow demand. There is progress, but if they can’t bring down inflationary expectations soon enough, the economic malaise could become protracted.”

With restrictions lifted, households wasted little time spending their built-up savings. Pent-up demand for travel and recreation contributed to the boost in overall consumption spending in the second quarter of this year, and real spending on services recovered to its pre-pandemic level. However, looking at the remainder of 2022 and into next year, Canadian consumers will take a spending pause as a result of higher prices, with this spending playing a reduced role in driving economic growth over the next year or two. For those who are highly leveraged, higher borrowing costs and falling home prices will severely limit their spending power.

The Canadian labour market appears to have run out of steam with three consecutive months of job losses and signs of more turbulence ahead. In August, the unemployment rate rose for the first time in seven months. Notably, this was the first increase since the onset of the pandemic not driven by a wave of infections or a tightening of COVID-19 public health measures. The Conference Board of Canada forecasts the economy will shed over 175,000 jobs in the second half of 2022.

The surge in commodity prices earlier this year has given resources businesses some much needed balance sheet relief, which should support some measure of new investment. Capital spending in the oil and gas sector is set to increase by 47.5 per cent this year. Looking more broadly at investments in Canada, private non-residential investment has been picking up steam over the past few quarters, and the momentum will continue through 2023. The recovery in travel markets is driving spending on machinery and equipment for airlines and other transportation companies in 2022. Fewer supply bottlenecks will support investment in manufacturing, particularly the auto sector, where exports are poised to pick up after nearly three difficult years.

Inflation is now running at the highest levels in recent memory in both the developed and developing world, although there are some tentative signs that it may have peaked in the United States. The ongoing trend toward declining commodity prices doesn’t include imported natural gas for Europe. Natural gas prices in Europe are roughly tenfold higher than pre-war levels, as Russian gas deliveries have plunged by 75 per cent since the beginning of the war.

South of the border, the U.S. economy contracted slightly in the first two quarters of this year, mainly because of volatility in inventories and rising imports. However, labour markets have stayed strong, suggesting that, despite the two consecutive quarters of negative growth, the economy isn’t currently in a recession. The prospects for 2023, however, are dimming. The best scenario is for slower economic growth to rebalance supply and demand in labour markets enough to restrain wage growth and eventually reduce inflation back to the Fed’s 2.0 per cent target.

The full research is available at the link here.

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