RSM’s economic forecast sees a slowdown, then stability

Economies respond to financial conditions which are determined by market expectations for monetary policy. With inflation still elevated and demand surging in Canada, we expect the Bank of Canada to continue raising interest rates to cool an overheating economy.

While the Canadian economy may avoid a recession next year, we expect growth will slow below 1 per cent over the next few quarters, well below its capacity.

The economy needs to slow down to rebalance demand and supply, and to relieve price pressures. After that, growth will pick up and the economy will grow solidly.

What else awaits? We offer our outlook for the coming year.

The economy will cool …

The economy was growing at an average rate of 1.7 per cent per year before the pandemic, only to go into freefall during the pandemic. All that changed in 2021 as the economy roared back following the shutdowns.

Now, the economy is experiencing excess demand. While the price of oil has put a floor under the decline, the combined interest rate and inflation shocks have dented housing, an important sector. 

Those shocks will ultimately lead to slower growth. Canadian gross domestic product is projected to decline from about 3.25 per cent growth this past year to just under 1 per cent in 2023 before rising to 2 per cent in 2024.

Canada real GDP growth and U.S. recessions

… inflation will ease …

The inflation rate surpassed 8 per cent in June but has come down in recent months, although some sectors remain elevated.

Interest-rate sensitive parts of the economy like housing and big-ticket consumer purchases are beginning to show the impact of the increased cost of credit. But the effects of higher rates will take time to sink in.

Expect inflation to fall to 3 per cent by the end of 2023 and return to the 2 per cent target by the end of 2024.

Bank of Canada policy rate and inflation

... and consumer spending will slow

Retail sales bottomed out during the pandemic along with consumer confidence, only to surge once the lockdowns were lifted. And that growth has continued.

We expect consumer confidence to wane and for retail sales to slow as long as inflation remains elevated. Because the consumer sector is behind much of the economy’s output, we expect that to translate into lower GDP growth.

Canada consumer confidence and retail sales

The labour market is tight …

It took a year and a half for service sector employment to recover to pre-pandemic levels, and then another six months for manufacturers to fully restore their staffing levels. 

The service sector comprises 80 per cent of total employment. Goods-producing occupations employ 20 per cent of workers but have knock-on effects that support overall growth.

Pandemic job deficits in the goods-producing and service sectors
INCREASE OR DECREASE IN 2020-22 EMPLOYEES RELATIVE TO FEBRUARY 2020

... which might be the new normal

Canada’s economy has undergone a transformation, both in terms of price stability—which is the mandate of Canada’s monetary policy—and full employment, which is achievable only within a framework of price stability.

Price stability was achieved decades ago after the Bank of Canada lowered its inflation target in a stepwise fashion and then acted to achieve that goal. Inflation finally fell below 4 per cent in 1991 when the bank adopted its 1 per cent to 3 per cent target range.

Likewise, full employment appears to be redefined every 10 to 15 years. What was once a double-digit unemployment rate is now approaching a 5 per cent equilibrium.

Long-term decline in Canada's unemployment rate

Businesses need capital and labour ...

Implicit in the Bank of Canada’s focus on price stability is achieving full employment and economic growth. The prerequisites for higher economic output are increases in capital and an increased supply of labour to operate that capital and buy the goods.

Growth rates of Canadian employment and real GDP

... and immigration has helped

But where do the workers come from, especially in a nation with an aging workforce? Canada’s population increased by 10 per cent between 2001 and 2021, with much of that increase due to immigration. This had positive implications for the labour force in terms of size and the introduction of new ideas.

Yearly changes in Canada's population due to natural growth and immigration

In the end, Canada is a powerful draw

People looking for a better life will choose the opportunity offered by high-income economies. Canada’s income per capita is among the highest in the world.

Gross national income per capita in selected economies