Thursday, May 30, 2024
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HomeBusinessA soft landing for the Canadian economy

A soft landing for the Canadian economy

By Pierre Cléroux, Vice President, Research and Chief Economist, BDC

Despite persistently high inflation and related interest rate hikes to the current level of 5.0 percent, the news was generally better than expected for the Canadian economy in 2023.

We now estimate Canadian economic growth of 1.3 percent in 2023, higher than the initial forecasts of Canadian economists. Population growth is largely responsible for this growth, driving vigorous demand. The economy’s performance will also have helped maintain the strength of the labour market, despite a rise in the unemployment rate in the second half of the year.

However, economic expansion was not spread evenly and some sectors experienced marked slowdowns. Domestically, the housing market has stabilized but remains below the peaks reached during the pandemic. Canadian households are increasingly cautious in their spending, and the slowdown in the global economy will have led to a deceleration in business investment and exports in the second half of the year.

“We believe that Canadian real GDP is set to grow by 0.9 percent in 2024, with one or two quarters of negative growth at the start of the year. However, a certain upturn in activity is expected in the second half of the year.~ Pierre Cléroux, Vice President, Research and Chief Economist, BDC

Unfortunately, inflation will remain in the 2-3 percent, which still implies a rise in prices. However, it will be slower than what we’ve experienced over the past two years. On the other hand, inflation on certain budget items will remain stubbornly higher.

Food inflation will remain high at around 4-5 percent in the coming months. Otherwise, housing-related expenses, notably rent and mortgage interest costs, will also continue to rise faster than the 2 percent target, particularly in the first half of the year.

After two years of rate hikes, Canadians should expect interest rates to remain flat for most of the year. Past rate hikes will continue to weigh on economic growth, but the bulk of this slowdown has most likely already taken place.

The key rate will remain at 5.0 percent for the first half of 2024, but we anticipate a first downward revision as early as this summer. However, the Bank of Canada will not bring its key rate back close to 2.5 percent, the neutral rate, before 2025.

Remember, a soft landing is still a landing, and there are risks lurking over the economy’s performance all the time. The outlook for 2024 depends heavily on the trajectory of interest rates and inflation, among other things.

The Bank of Canada’s monetary policy will be the most important factor for the Canadian economy in 2024. A soft landing should leave the country in a good position for growth when interest rates pick up, or to react in the event of another external shock or recession.

How to start 2024 on the right foot?

  • Focus on maintaining sound management of your human resources. While wage growth can be expected to return to a more sustainable pace in 2024, the long-term ageing of the Canadian population will keep labour markets tight for years to come.
  • As interest rates remain high and demand slows, you should increasingly be looking at technology to boost productivity and improve competitiveness.
  • Prepare your business for the eventual growth that will pick up once interest rates start to come down again.
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