Canada’s near-term economic woes will ease if growth picks up next year and the Bank of Canada begins lowering its key lending rates, according to a new forecast from Deloitte Canada.
In its latest economic outlook report released Thursday, the company said that the better-than-expected U.S. outlook and continued population growth here are contributing to some of the downward pressure from high household debt, high interest payments and persistent inflation. He said that it would offset the
“The economy will definitely recover in the first half of next year,” said Deloitte Canada chief economist Dawn Desjardins, a co-author of the report.
“The economic recovery will accelerate in the second half of 2024, as this is when we expect the Bank of Canada to be able to pivot from today’s high interest rates,” he said.
The report predicts that gross domestic product (GDP) will increase by 1% this year and 0.9% next year. Deloitte Canada previously predicted that GDP would contract by 0.9% in 2023.
But Desjardins said the next two quarters will be tough for Canada’s economy.
“Canada’s economy is in a tough spot and growth is likely to be negligible,” he said. “In fact, we have some negative quarters in our forecast.”
The economic slowdown is due to months of clampdowns by the Bank of Canada on high inflation, which has increased household debt and interest payments, a situation Deloitte economists expect to persist in the short term.
Desjardins said one-third of Canadian households have a mortgage, and more households are refinancing their properties as they struggle to make monthly mortgage payments, a trend that will continue. It is expected that this will continue, he added.
“We think the housing market will continue to be relatively weak (in the short term),” Desjardins said, adding that other sectors will also be affected.
“People then stop buying durable goods like refrigerators, stoves and washing machines that they would normally buy when they buy a new home.”
Deloitte Canada said that despite the affordability and housing crisis, stronger U.S. trade and Canada’s growing population appear to be helping the country avoid a deep recession.
Canada’s population is set to grow by 2.7 per cent this year, but the only time it came close to this kind of population jump was in 1971, when it grew by 2.2 per cent.
Economists predict that population growth will outpace employment growth in the coming months, pushing the unemployment rate to 5.9% early next year. The decline in employment will increase the unemployment rate, which in turn will slow consumer spending.
Canada’s record population growth also prompted Deloitte to recalibrate expectations for consumer spending. The report suggests that real per capita consumption fell by 1.5% last year, roughly in line with lower real wages and higher interest rates.
“We’re finally seeing evidence that consumers are taking a step back,” Desjardins said. “Bank interest rate hikes are putting pressure on some budgets.”
The report suggests that consumer spending will increase by 2% this year, but will slow to 1.2% in 2024.
Deloitte Canada expects overnight interest rates to fall to a neutral level of 3% by mid-2025.
Regarding the business sector, the report says investment prospects will remain weak in the near term as cost pressures and economic uncertainty hamper Canadians’ confidence.
This report by The Canadian Press was first published Sept. 28, 2023.
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