Ratings firm notes unemployment and lagging potential for economy
The Canadian economy continues to face significant challenges including rising unemployment and growth that belies the country’s potential according to a new revised forecast from S&P Global.
However, the ratings firm acknowledges the better-than-expected performance of the economy in the second quarter of 2024 and says it now expects full-year real GDP to be 1.2%, slightly improved from the 1.1% it was forecasting a quarter ago.
Second quarter real GDP on an expenditure basis was up 2.1% from the previous quarter, beating the 1.6% that S&P Global had expected. Although real GDP growth on a per-capita basis has now dipped below zero in seven out of the past eight quarters.
The forecast expects that fixed investment will be the main driver of growth rather than consumer spending, as investment switches to expansion rather than contraction albeit in a small way. Overall growth is likely to be below the economy’s potential.
The lagged impact of higher interest rates is expected to weigh on households with borrowing costs, especially for those with mortgages renewed at higher rates, biting into budgets. “Many homeowners will see interest payments as a share of income rise in upcoming five-year mortgage renewals over 2025 and 2026, relative to 2020-2021 contracts,” the report says.
S&P Global’s report notes uncertainty in changes to Canada’s immigration policy and how this will impact the baseline forecast such as curbing consumption growth seen in 2022 and 2023.
Rates and inflation
The report highlights the softness in the labour market with weaker hiring demand and more people seeking work pushing unemployment to 6.6% in August from the 6.2% average in the second quarter and 5.9% in the first. This is expected to nudge closer to 7% by the end of this year before reversing in 2025.
Wage growth, as measured by the Labor Force Survey, was 5.0% year-on-year in August, but the Bank of Canada's preferred measure of quarterly earnings growth showed a more modest 3.8% increase, with just 2.9% growth in the business sector. But productivity growth remains well behind wage growth, which poses challenges to maintaining 2% inflation.
Inflation should be in the 2% to 2.5% range in the next 12 months but could fall below the target.
S&P Global expects interest rates to be cut to 3.75% by year-end 2024 and to be 2.5% by the end of 2025, but this will depend on growth and the risk that inflation falls too much, as stated by the Bank of Canada.
