Questions About Canada’s Economic Trends

Canada’s growth has been pressured by multiple factors working simultaneously—higher interest rates reducing consumer spending and business investment, cooling housing markets, and weaker demand from the U.S. and China. Since the Bank of Canada started raising rates in March 2022, quarterly growth has hovered around 0.2-0.3%, reflecting a significant deceleration from the post-pandemic rebound we saw in 2021-2022.

The Bank has signaled a pause in rate hikes as inflation has gradually moved toward their 2% target, but whether they’re “done” depends on incoming data. If inflation picks back up or labor market tightness resurfaces, they could hike again—so it’s more accurate to say they’re in a holding pattern rather than permanently pausing.

Headline inflation peaked at 8.1% in June 2022 and has since cooled to around 3-4% range as of late 2023, though it’s still above the Bank of Canada’s 2% target. The drop has been faster than many expected, largely because energy prices normalized and supply chain pressures eased—but services inflation and shelter costs have proven stickier, which is why we’re not at target yet.

Employment has held up better than GDP growth might suggest, though the labor market is cooling gradually. Unemployment crept up from historic lows around 4.7% to the mid-5% range, and job creation has slowed compared to 2021-2022. The labor force participation rate has also ticked down slightly, which is partly demographic but also reflects some workers stepping back as real wages get pressured by remaining inflation.

Technology, healthcare, and professional services have remained relatively resilient, while construction and retail are facing headwinds from higher borrowing costs and softer consumer spending. Energy and mining have benefited from commodity price strength, though manufacturing output has weakened alongside slowing exports—the picture is uneven across regions, with Alberta and Saskatchewan outperforming due to oil and gas, while Ontario and B.C. have faced more pressure.

Most forecasters expect modest growth of 0.5-1.5% for 2024, with risks tilted downward if U.S. recession fears materialize or if the Bank of Canada has to pause rate cuts longer than anticipated. The key watch points are whether wage-price dynamics stabilize, if the housing market finds a new equilibrium, and whether consumer confidence rebounds as real incomes improve—right now we’re in a “soft landing” scenario, but there’s meaningful uncertainty around the outlook.