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2023 economic outlook: Cause for caution, not alarm

8-minute read

In 2022, the question on everyone’s mind quickly switched from “Is the pandemic over?” to “Are we in a recession?” The answer is simple: Canada is still not in a recession.

Despite the bleak economic outlook in recent months, a recession is still avoidable for the Canadian economy. However, 2023 will be shaped by growth below the economy’s potential and a great deal of uncertainty.

The slowdown is needed to curb inflation, as the risk of doing too little outweighs the risk of doing too much too fast.

Key statistics for 2023

Canada’s GDP growth


Key interest rate peak


Expected wage growth


The legacy of an eventful year

Clearly, 2022 was a turning point for the global economy. The war in Ukraine, the resulting sanctions on Russia and a significant slowdown in China have disrupted global growth in the past 12 months.

Economic growth was limited by the tightening monetary policies of central banks that hiked up interest rates to drive down inflation.

The European economy suffered a serious setback following the invasion of Ukraine in late February 2022 and is still facing a major energy crisis.

In the United States, households have been cautious and pessimistic about high inflation, rising interest rates and a declining stock market, all of which caused GDP to fall in the first two quarters. However, a rebound in the second half of the year helped offset these losses.

Faced with these global challenges, Canada’s economy has been resilient. Growth has been sustained by:

  • a strong job market recovery
  • household savings
  • high commodity prices
  • an increase in business investment
  • the strong demand for services unleashed after COVID restrictions were lifted

We estimate that GDP growth was 3.5% in 2022.

What can we expect in 2023?

Whether or not there will be a recession, the consensus is that the economy is set to slow down in 2023.

The slowdown is caused by the Bank of Canada’s fight against inflation to bring an overheating economy under control. However, there is still a lot of uncertainty about how the current economic conditions will respond to tighter monetary policy.

The recipe to get inflation back on target looks easy in theory: demand must be reined in to meet supply. As a result, we believe that 2023–24 GDP growth will be below it’s 2.0% potential, as estimated by the Bank of Canada.

Households and businesses remain cautious

Household spending is the main driver of growth in Canada. While consumption is usually responsible for about 60% of growth, we estimate that it accounted for around 80% of GDP growth in 2022.

During an economic downturn, working adults tend to spend less and save more for fear of being laid off. In fact, while household savings have slowed down since their 2020 peak, they are still significantly higher than before the pandemic.

Higher interest rates have driven down the price of shares and houses, and that trend is expected to continue in 2023. Lower asset prices will negatively impact household spending while the post-pandemic consumer spending boom will continue to subside. All of these factors translate into a slowdown in consumer spending.

The slowdown will impact business sales. The first quarter of the year, in particular, will be critical. An important decline in activity could force businesses to rethink their investment plans.

A mix of hope and patience when it comes to inflation

There’s hope when it comes to inflation, but we still have a ways to go. The Bank of Canada raised its key rate by 400 basis points in 2022, and inflation has been slowing since June.

The fight against inflation is not over yet; the policy rate could go as high as 4.5%.

The policy rate currently stands at 4.25%. We believe we will have to wait until the first quarter of the year for the central bank to take a pause and give past hikes time to exert their full impact on the economy.

It could begin cutting rates at some point in 2023, and it will be another 18 months before we see a return to the neutral rate of 2.5%.

A gradual return to a balanced job market

Typically, an economic downturn is accompanied by a rise in the unemployment rate. Layoffs surge while businesses lower their production.

But given the current labour shortages, these cutbacks are expected to translate into fewer hours worked and slower hiring. Many businesses still have staffing issues. In fact, Canada still had about a million job vacancies in September.

The mismatch in skills between the available workforce and the needs of businesses does not mean that there won’t be any layoffs or that labour shortages will disappear in 2023. The impact of the downturn on the job market will simply be less pronounced than during similar periods in the past.

A stagnation, not a recession

There is a possible path to a soft economic landing that depends on the appropriate level of monetary tightening.

With the economy still on a solid footing, we expect stagnation rather than a contraction.

Our most plausible scenario is the Canadian GDP growing by 0.5% in 2023, with one or two negative quarters here and there.

The slowdown will be more pronounced in residential investment and goods consumption. A hefty share of household incomes will continue to be eaten up by energy and food prices, and demand for services will drop as the year goes on. The Canadian dollar will remain relatively weak against the U.S. dollar, which will tip the scales in favour of exports (over imports).

Ultimately, Canada is in a strong position to control its own fate, as the slowdown results from monetary policy tightening rather than from an external shock.

Raw materials: A safety net for some provinces

The downturn will be felt from coast to coast, but it will impact regions unevenly. Economies dependent on interest-rate-sensitive industries—such as residential real estate, construction and the sale of durable goods—could be the first to feel the impact of the fight against inflation. This is particularly true for Ontario and British Columbia.

The U.S. slowdown will have a greater impact on provinces that are more dependent on manufacturing. A harsher-than-expected slowdown south of the border is weighing on central Canada’s economic outlook (Quebec and Ontario).

The ultimate beneficiaries in 2023 will be the same as in 2022; provinces that produce commodities will have a better year than those that don’t—led by Saskatchewan, which will continue to benefit from strong global demand for agricultural products and fertilizer. Despite the global slowdown, Alberta and Newfoundland will continue to reap the rewards of high oil prices.

Manitoba has the most diverse economy in Canada, typically making it more resilient to the ups and downs of the global economy.

In the Maritimes, the slowdown will be offset in part by population growth and by a vibrant fishing and food-processing industry. Nonetheless, they will still register some of the lowest growth rates in the country.

Challenges for entrepreneurs in 2023

Even if economic uncertainty remains a major concern, labour shortages are the biggest challenge for businesses.

As the economy slows and immigration gets back on track, labour shortages are expected to subside in the short term. However, the population is aging and there is a mismatch between the skills of available workers and the needs of industries and provinces. As a result, the labour shortage will continue to be an issue for many businesses.

Labour shortages will also affect wages, which skyrocketed in 2022 and are expected keep growing in 2023. We expect wage growth to average 4% in 2023, well above the pre-pandemic rate of 2.7%. Inflation expectations also exert upward pressure on wages.

Other factors have weighed heavily on business costs over the past year. Supply chains have been affected by bottlenecks, among other things, but the pressure has eased off in 2022. Many businesses diversified their supply sources and increased storage capacity. Inventories are already starting to build up in warehouses, and businesses will have to continue to adapt to balance supply with slowing demand.

Despite these challenges, Canadian businesses are well positioned to weather the 2023 downturn. Our surveys show that 88% were profitable in October, and 69% said they were well prepared for an economic downturn or recession.

There is, therefore, no need to be alarmed, but caution is advised. Consumers are still in good financial health, which should allow us to steer through this slowdown until we reach conditions that are more favourable to growth.

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