Fall 2023 economic update: Is the rollercoaster ride over yet?
4-minute read
The Canadian economy has been on a bit of a rollercoaster ride for the past three years.
After a massive shock caused by the COVID-19 pandemic, large government stimulus and a rapid reopening led to supply chain hiccups, labour shortages and a rise in inflation. The Bank of Canada responded by increasing rates from 0.25% to 5.0% in a little less than 18 months.
Interest rates are now at their highest levels since 2001. And while older generations will remember that rates were higher in the 1980s and 90s, it is undeniable that for most companies the cost of doing business is now higher than it was a few years ago.
Higher interest rates are working
The good news is that higher interest rates have been effective in curbing inflation. After reaching a 39-year high of 8.1% in June 2022, inflation has been decreasing, reaching 2.8% in June before picking up slightly to 3.3% in July.
However, the fight against inflation isn’t over yet. For this reason, we expect the policy rate to remain at its current level until mid-2024. This should provide greater certainty to entrepreneurs and households who can expect lending costs to stabilize.
However, higher interest rates are having an impact on the growth rate, which decreased by 0.2% in the second quarter of 2023.
It is also affecting consumers. They are turning more cautious, and spending is now starting to slow down. This slowdown will likely continue: The full effect of rate hikes will likely only be fully felt once more homeowners renew their mortgage.
The pressure on sales is being felt in consumer facing industries that are more sensitive to interest rates, such as:
- retail and wholesale trade
- accommodation and food services businesses
- the construction and real estate industry
Canadian regions with high debt levels are also more likely to feel the effect of higher rates.
Key numbers for the Canadian economy
| 1.3% | Forecasted GDP growth for the Canadian economy in 2023. |
| Mid-2024 | Expected easing of interest rates by the Bank of Canada. |
| ~900 000 | Target for new permanent immigrants to Canada. High immigration will help ease labour shortages and support consumer spending. |
The end of the rollercoaster?
High inflation created a lot of uncertainty as businesses struggled to manage rapidly rising input and labour costs. It was also harder to plan future investments in an environment where lending costs were rising almost every month. With inflation now largely under control, businesses will benefit from a return to stability.
Labour shortages have been one of the biggest headaches facing business owners in the past year. But a rapid inflow of immigrants has helped loosen the job market somewhat, easing the pressure on wage growth. A slight downtick in economic growth may help businesses hire the workers they need to meet consumer demand.
Labour markets remain strong, and population growth is expected to continue, which should ensure that consumer spending doesn’t drop too much.
Meanwhile, supply chains have been returning to normal, a process that should be helped by slower economic growth.
Overall, after a few years of extreme highs and lows, we expect a soft landing for the Canadian economy. This slowdown will help reset expectations and may even stabilize conditions for many businesses, setting the stage for future growth after 2024.
What does it mean for entrepreneurs?
While the resiliency of the Canadian economy is good news for entrepreneurs, they will still need to manage higher interest costs and a slowdown in consumer spending.
If your business is in an industry that’s more sensitive to interest rates, then you will likely want to keep a close eye on your finances. Good financial management as well as a close cooperation with your partners are key elements to remain sustainable in a slowing economy.
Our studies have shown that investing in productivity and automation is one of the best ways to ease the pressures of a tight labour market. It is also a great way to grow revenues and profits in more difficult circumstances.
One place to start is to try the workforce efficiency benchmarking tool. This free tool can help you find out if your business is efficient and provide you with advice to improve your performance.