Canada’s economy continues its slowdown: Conference Board of Canada

Canada’s economy has entered a slow glide phase. With no serious external shocks to the upside or the down, the cumulative effects of heightened borrowing costs have brought growth to a standstill, according to a new report by the Conference Board of Canada.

Mikhail Nilov

“That is even a charitable way to describe things, because if not for booming population numbers, the economy would be shrinking at a meaningful clip,” said the Board’s Five-Year Outlook. “The influx of new Canadians through permanent and non-permanent residency channels has filled gaps in labour markets and supported demand, but their numbers have not translated into improving Canada’s productive capacity. Not that they should have been expected to—the benefits of in-migration take time and tend to show up in the medium and long run as new Canadians’ skills and talents take hold in a new setting. Short-term effects are more problematic—with a housing supply crunch adding to the usual settlement cost challenges facing new entrants.

“The surging population has helped labour markets gradually loosen. The unemployment rate has crept up to 5.5 per cent, and the latest job gains we have seen are not based on robust drivers. For example, August numbers were driven by a surge in the number of unincorporated self-employed. Although it’s too early to call a trend, this form of employment is normally a sign of economic weakness. We expect labour markets to settle further over the next three-quarters of a year, pushing unemployment rates to 5.9 per cent by mid-2024. These adjustments are not large when compared with past recessions, but they will help keep wage trends from igniting the kind of price spirals for which the Bank of Canada has been on
watch.”

The report said price growth is considerably nearer to the Bank’s 1.5 to 2.5 per cent target range than it was this time last year, but the last mile is the most difficult.

“After inflation bumped back up to 4.0 per cent in August, we expect consumer price growth will take until early 2025 to claw its way back to a stable 2.0 per cent. The Bank will not have to wait until then to start reducing rates, but it needs to see enough progress. Our bet is late spring for when rates start to come down. A lot can happen between now and then, and any lingering price stubbornness—more likely emanating south of the border—may spur another dose of bitter medicine. That scenario, however, is not in our base assumptions.

“Slowing growth in the United States and other major trading partners will constrain export volumes, but commensurate weakness in domestic demand will slow imports as well—leaving a small positive effect on net trade balances. Oil prices will be a little higher than in our previous forecast owing to interventions from the Organization of Petroleum Exporting Countries (OPEC) and Russia, but prices for agricultural commodities, minerals, and forest product will remain well off last year’s highs.”

The Board said the Canadian consumer is in for a rough ride as a result of higher borrowing costs. Mortgage interest has gobbled up an extra 2 percentage points of disposable income in less than 18 months, undoing more than 25 years of gradual easing. (See chart.) U.S. consumers, by comparison, are seeing far milder adjustments on account of their reliance on 30-year fixed amortizations. Averages, however, can deceive. Only
roughly 40 per cent of Canadian households have mortgages, so the 2 per cent spike in debt service ratios for the population as a whole is effectively 5 per cent for those carrying a home on average and much higher for those highly leveraged, it said.

“In all, we expect the Canadian economy to follow its slight reversal in real GDP in the second quarter with two more quarterly declines to round out the year. We are also riding the brakes on the opening months of 2024. None of the expected changes are large, however, so the net effect should be something akin to a dead stop when measured over a full year. The year 2023 will end up with a weak 0.9 per cent gain in real output, but only because the first quarter came in hot. The result for 2024 will be a weaker 0.6 per cent growth rate, but once the recovery takes hold in 2025–28, the economy should post annual growth in the mid-2 per cent territory—near economic potential,” concluded the report.

Mario Toneguzzi

Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)