Canada's economy is stabilizing with declining inflation, but investment and productivity hurdles remain
According to Deloitte’s summer economic forecast, the Canadian economy is beginning to settle down after three years of upheaval.
Inflation has been steadily declining since its peak in June 2022, leading the Bank of Canada to ease its policy stance, which could stimulate stronger economic growth.
However, the pace of monetary easing remains uncertain, and weak investment and productivity continue to pose risks to Canada's long-term economic outlook.
Interest rates, which increased rapidly from March 2022 to July 2023, are expected to decrease gradually. Following a rate cut in June, another cut is anticipated in September, with subsequent cuts in December and throughout 2025.
The overnight rate is projected to stabilize at 2.75 per cent by the end of next year, assuming inflation decreases gradually and reaches the 2 per cent target by mid-2025.
Business sentiment in Canada is showing signs of recovery despite an increase in insolvencies. The latest Business Outlook Survey by the Bank of Canada indicates improved business confidence in early 2024 after nearly two years of decline.
This optimism could lead to increased business investment, which is crucial for boosting labour productivity and improving living standards.
Since the 2014 commodity price crash, business investment has been weak, resulting in stagnant labour productivity and a 30 per cent increase in unit labour costs. Enhancing business investment is key to addressing these issues.
While business investment is expected to grow each quarter of 2024, it will be challenging to overcome the substantial declines of late 2023, resulting in negative annual growth for the year.
However, the outlook for 2025 is more positive, partly due to the start of construction on several electric vehicle battery plants. Addressing weak business investment and productivity performance with urgency is essential.
Canada faces the challenge of generating enough jobs to keep pace with its rapidly growing population.
Although job creation in April 2024 was strong, employment growth (+2.0 per cent) has not matched population growth (+3.4 per cent) over the past year, leading to a rise in the unemployment rate to 6.2 per cent.
This rate is expected to remain elevated for the rest of 2024 but should begin to decrease in 2025.
Wage growth, which averaged 5.3 per cent in 2023, slowed to 3.9 per cent in early 2024. As inflationary pressures ease, slower wage growth is expected to persist through 2025. Despite the Bank of Canada cutting its policy interest rate, Canadian households remain the most indebted in the G7.
Rising interest rates since 2022 have reduced consumer spending, with real consumer spending per person falling in five of the last seven quarters. The impact on home-building has been even more significant, with real residential investment per person down 22.8 per cent from two years ago.
Consumer spending and residential investment are projected to increase as interest rates decrease, restoring demand.
However, low consumer confidence, reluctance to make major purchases, housing affordability challenges, and high savings rates will slow recovery in the latter half of 2024, with stronger gains expected in 2025.
Canada's economy showed stronger-than-expected growth in early 2024, but slower household spending is expected to limit real GDP growth to 1.2 percent for the year, followed by 2.6 per cent growth in 2025.
In per-capita terms, real GDP growth will decline by 1.6 per cent in 2024 before rising by 1.1 per cent in 2025.
Provincial Economic Outlook
The economic outlook varies across Canada's provinces:
Atlantic Canada: Newfoundland and Labrador expect better growth due to higher oil production, with real GDP rising by 1 per cent in 2024 and 1.7 per cent in 2025.
Prince Edward Island is projected to continue its economic growth leadership with strong population growth and easing inflation, supporting household spending and GDP growth of 3.9 per cent in 2024 and 3.7 per cent in 2025.
Nova Scotia anticipates growth of 1.7 per cent in 2024 and 1.9 per cent in 2025, driven by interest rate cuts, public sector spending, and export rebounds. New Brunswick expects 1.5 per cent growth in 2024 and 2.2 per cent in 2025, despite challenges in its export sector.
Central Canada: Quebec's GDP growth will be muted at 0.7 per cent in 2024 due to soft population growth, but investments in non-residential sectors should drive growth to 2.6 per cent in 2025.
Ontario's economy will benefit from investments in the EV battery manufacturing sector, with GDP growth of 1 per cent in 2024 and 2.6 per cent in 2025.
Prairies: Manitoba will see GDP growth of 1.1 per cent in 2024, with improved affordability propelling gains to 3.1 per cent in 2025. Saskatchewan expects 1.6 per cent growth in 2024 and 4.3 per cent in 2025, driven by a recovery in the agriculture sector and strong business investment.
Alberta, benefiting from a population surge and the Trans Mountain pipeline expansion, expects GDP growth of 1.5 per cent in 2024 and 3.3 per cent in 2025.
British Columbia: The province's GDP growth will be weak at 0.7 per cent in 2024 due to high household debt, but growth is expected to rebound to 2.9 per cent in 2025 with increased consumer spending and housing construction.
The economic outlook has generally been positive, with GDP and employment performing better than expected and the Bank of Canada beginning to cut interest rates. Lower interest rates should encourage household spending and business investment.
However, risks remain, including geopolitical tensions and the possibility that inflation and interest rates may not decrease as anticipated. Improving productivity is essential for achieving sustainable 2 per cent inflation and supporting long-term economic growth in Canada.
