Canadian economic outlook for 2024: Shifting into neutral
Despite persistently high inflation and rising interest rates, the news was generally better than expected for the Canadian economy in 2023.
At this time last year, many economists wondered whether it was possible to stop the Canadian economy from overheating without causing a recession. Yet we now estimate 1.1% growth for the Canadian economy in 2023, slightly lower than the economy’s 2% potential, but still higher than initial forecasts.
Strong population growth was largely responsible for the vigorous demand that supported the Canadian economy in 2023. In turn, the economy's performance helped sustain the labour market. The unemployment rate did rise in the second half of the year, but that was caused by growth of the active working population rather than a slowdown in hiring. About 430,000 jobs were created between January and November 2023.
The resilience of the Canadian economy prompted the Bank of Canada to raise its key rate further during the year, increasing it by 75 basis points to its current level of 5.0%.
As a result, growth was uneven in 2023, with sectors that are sensitive to interest rates—such as housing—experiencing marked slowdowns. The residential market has mostly stabilized but remains in a slump. Canadian households are spending less, and the global economic slowdown caused a deceleration in business investment and exports in the second half of the year.
Key statistics for 2024
Canada’s forecasted GDP growth
2% to 3%
Expected interest rate decrease
Canadian economic growth will be slightly lower in 2024
Canada's economy should avoid recession in 2024, but growth will remain elusive. While the economy should benefit from a more predictable environment, high interest rates will continue to weigh against more vigorous economic activity.
Real GDP growth in Canada, 2019 to 2024
International and domestic factors will also limit growth.
The U.S. will likely continue to grow faster than other major economies. As a result, the U.S. dollar will remain strong against most other currencies, including the Canadian dollar. Overall, the Canadian dollar will remain in the 72 to 75 cents range in 2024. A weaker loonie could make Canadian exports cheaper. It also makes us more attractive to tourists.
Global oil prices are expected to range between US$70 and US$80 per barrel for WTI and US$75 and US$85 for Brent. A small surplus could cause prices to decline in early 2024. Although OPEC+ will continue to cutback on production in 2024 to mitigate the price drop.
High interest rates remain the driving force behind a global economic slowdown. The Canadian economy is more vulnerable to a deeper slowdown than our American neighbours, in part because of our debt level.
Inflation will decline but remain above the target range
Inflation in Canada has been relatively stable over the past 30 years, rising by about 2% per year. However, it was common to see prices rise by around 8% in the 1970s and 1980s, going as high as 13%.
We expect inflation to keep getting lower, staying between 2% and 3%. We do not believe stable 2% inflation will be achieved until the end of 2024.
While we expect inflation to be lower than we've experienced over the past two years, price increases for certain items, such as food and housing, will remain high for Canadians.
Food price inflation is expected to remain at around 4-5% over the coming months. Food is often traded on world markets, and the Canadian dollar's weakness will help push prices higher. Housing-related expenses, notably rent and mortgage interest costs, will also continue to rise faster than the Bank of Canada’s 2% inflation target, particularly in the first half of the year.
Inflation by category over the last 12 months in Canada
The direction of central bank rate policy becomes clearer
Probably the best news for 2024 is less uncertainty concerning interest rates. Canadians should find comfort in that the most aggressive interest rate hikes in 40 years are ending. High interest rates will continue to weigh on growth, but most of the slowdown has likely already occurred.
We anticipate that the Bank of Canada will begin lowering its key rate as early as this summer. However, the Bank is unlikely to bring the rate down to 2.5%, the neutral level, before 2025. Rates will remain higher than those to which Canadians have been used to over the past 15 years.
Relation between policy rate and inflation rate in Canada
3 main risks for the Canadian economy in 2024
While we expect a soft landing for the Canadian economy in 2024, the outlook depends heavily on interest rates and inflation. Three elements, in particular, could worsen the picture and tip the economy into a mild recession.
1. Geopolitical conflict
Growing geopolitical tensions could distort energy markets and reignite inflation. This would lead to further rate hikes by central banks. Conflicts are a common cause of recessions, but such shocks are difficult to predict.
2. Persistent inflation
Strong demand driven by population growth explains much of the resilience of the Canadian economy in 2023. While we expect a similar situation in 2024, overly strong demand could fuel inflation.
3. Collapsing demand
Even without further rate hikes, current interest rates could prove more difficult to face than expected for consumers and businesses. Canadian households are more vulnerable to high rates than those in other major economies, notably the U.S. This is because of high debt levels and shorter mortgage terms. The explosive growth in housing prices in recent years was a contributing factor and now pose a risk to the financial health of some households.
The outlooks for 2024 differ from one province to the other
This current economic slowdown results from high inflation and interest rate hikes. As such, the slowdown is not impacting all provinces and industries in the same way. Sectors that are more sensitive to high interest rates, such as real estate and financed goods, will continue to feel the bulk of the slowdown. Regions where consumers are more indebted or where these sectors account for a greater share of the economy will also lag.
The Bank of Canada's monetary policy is having the desired effect so far and inflation is decreasing. But inflation is not decreasing at the same speed across all regions. Quebec had the highest inflation rate in Canada in October at 4.2%. Prince Edward Island had the lowest at 1.7%.
Past interest rate hikes will continue to limit Canadians discretionary spending. This will be especially pronounced in British Columbia, Ontario and Quebec, where inflation is higher and households are more indebted.
The slowdown will be less pronounced for commodities-oriented provinces. They rely less heavily on households spending. Alberta and Saskatchewan are set to grow above the national average in 2024.
With a well-diversified economy, Manitoba has always been less sensitive to cyclical disruptions. This current slowdown should not be any different. However, the pullback in Canada’s biggest markets (B.C., Ontario and Quebec) could dented Manitoba’s exports. Around 50% of the province’s exports are to other provinces.
The Atlantic provinces benefited from the strong population increase experienced at the national level in 2023. However, slower forecasted growth in the U.S. and China could weaken the region’s exports in 2024.
Challenges and opportunities for entrepreneurs
The economic slowdown and strong population growth will make it easier for businesses to find workers than in recent years. Wage growth should return to a more sustainable pace in 2024 as pressure eases on the labour market. However, an ageing population will continue to make hiring difficult for years. Building a strong human resource strategy for your business remains an important strategy for the long-term success of your company.
With interest rates remaining high and demand slowing, entrepreneurs will need to be nimble and strive to maintain the financial health of their businesses. Adopting more technology can help by boosting productivity and improving competitiveness. Business owners who act now will be in a better position to capitalize when the economy takes off again.