Economic outlook

Economic activity resilient, but remains subdued

Strong Gross Domestic Product (GDP) figures for Q1 2024 leave the Canadian economy on firmer footing than 2023. However, the 0.4 percent increase, at annualized rates in Q1 2024, don’t make up for the losses that began to develop in 2023.

GDP in the last quarter of 2023 was revised down to 0.0 percent, leaving the economy close to a technical recession (two consecutive quarters of economic growth). Good news comes from the Bank of Canada (BoC) via the first reduction of interest rates in three years in June 2024. While the 0.25 percentage point decrease is small and will take time to filter through into the economy, the change of direction may act to shore up confidence.

Consumer price inflation is still notable and recorded an increase of 2.7 percent in April 2024. Services inflation remains elevated and the cost of shelter is uncomfortably high. Even with core inflation growth on a steady downward trajectory, the BoC will need to keep one eye on underlying pricing dynamics, with the other firmly focused on a weakened economy.

Source: Statistics Canada

Signs of slack are creeping into the labour market, which should give the BoC hope that that rate cuts will not unlock further gains in consumer prices. Canada’s unemployment rate ticked up again in May 2024, increasing to 6.2 percent and employment growth softened to 0.1 percent over the same period, as demand eases. Wage growth, however, remains sticky, with average hourly wages among employees increasing by 5.1 percent on the year in May 2024.

Overall, the outlook for the economy is close to the expectations set out three months ago. Mainstream thinking suggests that the Canadian economy will avoid a technical recession, with a soft landing to be navigated. The 2024 Federal Budget reinforces that opinion, identifying that Canada’s economy may grow by 0.7 percent in 2024, before ramping up to 1.9 percent in 2025. While the strength of the US economy may help bolster Canada’s performance, the upcoming elections could have a cooling effect on growth.

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