Canada’s near-term economic struggles will ease next year when growth returns and the Bank of Canada begins cutting its key lending rate, a new forecast from Deloitte Canada said.
A better-than-expected U.S. outlook and continued population growth here will offset some of the downward pressure from high household debt, soaring interest payments and stubbornly persistent inflation, the company said in its latest economic outlook report, released Thursday.
“We do have an economy getting back on its feet in the first half of next year,” said Dawn Desjardins, chief economist at Deloitte Canada, who co-authored the report.
“The recovery will pick up steam in the second half of 2024 because it’s during the time we anticipate the Bank of Canada will be able to pivot from having high interest rates we’re living with today,” she said.
The report estimates GDP will rise one per cent this year and 0.9 per cent next year. Deloitte Canada had earlier predicted GDP would contract 0.9 per cent in 2023.
The next two quarters for the Canadian economy, however, are going to be tough, Desjardins said.
“Canada’s economy has entered a rough patch and the growth is likely to be negligible,” she said. “In fact, we have a few negative quarters in the forecast.”
The slowdown results from the months-long crackdown on high inflation by the Bank of Canada, pushing household debt and interest payments higher — which the Deloitte economist expects will continue in the near term.
Desjardins said a third of Canadian households have a mortgage, adding that an increasing number of them are moving to refinance their property as they struggle to keep up with monthly mortgage payments — a trend expected to continue going forward.
“We do think the housing market will continue to be relatively sluggish (in the near term),” Desjardins said, which would affect other sectors as well.
“When that happens, people are not buying durable goods like refrigerators, stoves and washing machines they would normally purchase when they buy a new home.”
Despite the affordability and housing crises, Deloitte Canada said strengthening U.S. trade and population growth in Canada appear to be helping the country avoid a deeper recession.
Canada’s population is set to jump 2.7 per cent this year, the only other time the country came close to that type of population surge was back in 1971 when it rose 2.2 per cent.
Economists suggest population growth would outpace job gains in the coming months, with the unemployment rate expected to hit 5.9 per cent early next year. A pullback in hiring would drive unemployment and, in turn, slow down consumer spending.
Canada’s record-high population surge also pushed Deloitte to recalibrate its expectations for consumer spending. The report suggests real consumption on a per capita basis dropped 1.5 per cent over the last year, more in line with falling real wages and high interest rates.
“We have finally seen evidence that consumers are taking a step back,” Desjardins said. “The bank’s rate increases are stressing some budgets.”
The report suggests consumer spending this year will grow by two per cent but slow to a pace of 1.2 per cent in 2024.
Deloitte Canada estimates the overnight interest rate would fall to a neutral level of three per cent by mid-2025.
For the business sector, the report says the investment outlook remains muted in the near term as cost pressures and economic uncertainties hamper confidence among Canadians.
This report by The Canadian Press was first published Sept. 28, 2023.
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