Economic outlook

Canadian GDP growth blows hot and cold as economic headwinds build

A subdued economic environment saw quarterly Canadian GDP decline by 0.3 percent at annual rates in Q3 2023. Welcome revisions to Q2 2023 data, where GDP grew by 0.3 percent on the quarter, saw the economy avoid a technical recession, however.

Source: Statistics Canada

While monthly GDP figures offer a glimpse into potential Q4 2023 outcomes, October 2023 data saw the economy flatline. As such, the outlook for the immediate performance of the economy appears to be more pessimistic than optimistic.

Looking up, growth in the Consumer Price Index (CPI) has settled, with November’s inflationary print matching October’s 3.1 percent increase on the year.

The cost of shelter remains stubbornly high however, increasing by 5.9 percent on the year as of November 2023. While mortgage costs are easing and rent inflation is subsiding, growing less quickly at 29.7 and 7.4 percent respectively in November 2023, they remain elevated as interest rates are sustained.

Service cost growth also continues to be an issue for the Bank of Canada (BoC), increasing by 4.6 percent on the year in November 2023. Without a notable reduction in wage growth, which saw average weekly earnings increase by 4.0 percent in October 2023, interest rates may take longer to recalibrate.

Source: Statistics Canda

Persistently high interest rates are now making meaningful inroads into consumer spending habits, reducing disposable incomes, lowering confidence and paring back growth expectations. Should the BoC’s 2.0 percent policy mandate, targeting low and stable inflation, be achieved sooner, rate cuts could be unlocked and economic growth stimulated in 2024.

Even a growing labour market, helped by increases in population size, is struggling to fuel activity gains. GDP per capita has weakened and productivity continues to fall, reducing by 0.6 percent in Q3 2023, for the tenth time in the last 12 quarters. This may ultimately see large wage growth become transitory if it is not backed up by efficiency gains to warrant sustained salary increases.

As a result of the turbulent market conditions and growing headwinds GDP is likely to be constrained. Further revisions and fluctuations to published data, both upwards and downwards, are also possible as the year closes out and 2024 begins.

The International Monetary Fund, however, projects Canada to see the strongest economic growth in the G7 next year, with an increase in GDP by 1.6 percent in 2024. This forecast reflects a perceived gradual unwinding on monetary policy tightening as inflation comes back to target, stimulating economic growth.