Key Takeaways
- GDP growth in Canada will remain sluggish in coming quarters as higher interest rates continue to work through the economy. We now expect real GDP growth of 0.9% in 2024.
- Canada's job market will continue to be lackluster amid subpar domestic demand. Our forecast now sees the unemployment rate averaging 6.1% in 2024.
- We expect a 25-basis-point rate cut from the Bank of Canada in June, followed by cuts totaling 50 basis points in the second half of this year. And next year, we think there will be an additional 125 basis points of easing.
While S&P Global Ratings has nudged higher its full-year 2024 GDP growth forecast for Canada, we continue to believe that economic expansion in the near term will be sluggish.
We now expect Canada's GDP to grow 0.9% in full-year 2024--up slightly from the 0.7% we forecast last November--before the economy picks up in earnest in 2025 (see chart 1). And we expect GDP to grow a little more than 1% between the fourth quarter of 2024 and the fourth quarter of 2023--a way of measuring economic growth that avoids the statistical carry-over bias of the typically reported "annual average."
Economic growth in Canada will be slightly weaker this year than in full-year 2023, in our view--annual average growth last year was just 1.1%. But the economy should fare better in 2024 than it did during the last three quarters of 2023--growth then was weak, and there was even one quarter where the economy contracted slightly (see chart 2). Indeed, growth momentum has picked up slightly so far in the first quarter of 2024, though from a very low base.
Chart 1
Chart 2
We revised up our Canada GDP growth forecast for this year because some metrics are outperforming our expectations from last November. For example, we raised our forecast for first-quarter growth given the slightly stronger-than-expected acceleration in consumer spending in January and February (retail sales as well as consumer sentiment surprised to the upside).
In addition, home sales are tracking higher than last quarter even as they took a breather in February and the mortgage rate crept back up during the first two months of this year (see chart 3). This should support residential investment growth this quarter, even though housing starts are likely to take away from growth. And while housing starts in the first two months of this quarter were below their average level for the fourth quarter of 2023, they remain on a solid trend and are surpassing our expectations, with support from rental units and population growth.
Chart 3
All that said, we don't see a reason for there to be a sustained pickup in GDP growth momentum until monetary policy easing begins in Canada (later this year, in our view). Aggregate outlays are still underperforming, especially on a per capita basis. And the unemployment rate has risen by 0.8 percentage points since the beginning of the year, to 5.8% in February--an increase that is partly due to a rise in the number of people in the labor force, fueled by a growing immigrant population. But employment gains have also been muddling through at just about the pre-pandemic average after a sharp slowdown in private sector hiring over the first half of last year. Jobs growth has now lagged population growth for 13 straight months.
Chart 4
With subpar domestic demand in store, Canada's job market will remain sluggish. As more people join the labor force, the unemployment rate is likely to increase further--to 6.3%, on average, by the fourth quarter of this year--after averaging 5.4% last year. Wages grew 5% year on year in February (down from 5.3% in January and 5.7% in December), and we expect that trend to continue as the labor market loosens further.
The Bank of Canada, at its March policy meeting, kept the overnight rate unchanged at 5%. The central bank maintained its messaging--that the path of inflation remains the key factor in its deliberations even though the economy has weakened considerably. Just when the "last mile" of disinflation was proving difficult in the second half of last year, details from the Consumer Price Index (CPI) reports out since the beginning of this year have showed further moderation in the amount and scope of domestic price pressure:
- Inflation in Canada, as measured using headline CPI, dropped to 2.8% in February, just a touch below the upper end of the Bank of Canada's 1%-3% target range; the consensus forecast saw a rebound to 3.1% (see chart 5).
- The central bank's preferred core inflation measures moved lower in February, to a 3.2% average year on year, down from 3.4% in January. The moderation in inflation pressures was broad-based, with the CPI-trim and CPI-median measures each rising by just 0.1% month over month for the second consecutive month.
- And the average three-month annualized inflation rate (2.9%) fell below 3% for the first time since April 2021.
Chart 5
The ongoing weakness in consumer spending and labor market conditions supports our view that inflation will keep moderating in the quarters ahead. The Bank of Canada does still have a shelter price problem, but we now assume it is done with rate hikes and will look past shelter price inflation to start cutting rates in June. We expect 75 basis points of rate cuts altogether this year, and another 125 basis points of rate cuts next year (see chart 6).
Chart 6
| S&P Global Ratings' Canada economic forecast | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 2024 | ||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f | ||||||||||||
| Key indicators (annual average % change) | ||||||||||||||||||||
| Real GDP | 1.9 | (5.0) | 5.3 | 3.8 | 1.1 | 0.9 | 1.5 | 2.2 | 2.1 | |||||||||||
| Change from November forecast (ppts) | 0.2 | 0.1 | 0.3 | (0.1) | ||||||||||||||||
| Domestic demand | 1.1 | (5.4) | 6.8 | 5.2 | (0.3) | 0.8 | 1.4 | 2.1 | 1.9 | |||||||||||
| Consumer spending | 1.6 | (6.3) | 5.1 | 5.1 | 1.7 | 0.6 | 1.5 | 2.2 | 2.4 | |||||||||||
| Nonresidential fixed investment | 3.2 | (12.4) | 8.6 | 3.9 | (0.8) | 2.7 | 1.8 | 2.1 | 1.2 | |||||||||||
| Residential investment | (0.8) | 2.9 | 14.6 | (12.1) | (10.2) | 1.2 | 2.8 | 5.1 | 2.2 | |||||||||||
| Government consumption | 1.1 | 1.3 | 5.4 | 3.2 | 1.5 | 0.1 | 0.1 | 1.4 | 1.2 | |||||||||||
| Real exports | 2.3 | (9.0) | 2.7 | 3.2 | 5.7 | 2.7 | 2.4 | 2.1 | 1.7 | |||||||||||
| Real imports | (0.1) | (9.4) | 8.1 | 7.6 | 1.0 | 0.7 | 2.0 | 1.7 | 1.2 | |||||||||||
| CPI | 2.0 | 0.7 | 3.4 | 6.8 | 3.9 | 2.5 | 2.3 | 2.1 | 2.0 | |||||||||||
| Core CPI | 2.1 | 0.9 | 2.6 | 5.0 | 3.9 | 2.6 | 2.1 | 1.9 | 2.0 | |||||||||||
| Key indicators (annual average levels) | ||||||||||||||||||||
| Unemployment rate (%) | 5.7 | 9.7 | 7.5 | 5.3 | 5.4 | 6.1 | 5.7 | 5.5 | 5.4 | |||||||||||
| Exchange rate per US$ | 1.33 | 1.34 | 1.25 | 1.30 | 1.35 | 1.32 | 1.28 | 1.28 | 1.28 | |||||||||||
| Housing starts ('000s) | 207.4 | 218.9 | 273.3 | 262.7 | 240.8 | 210.1 | 210.4 | 215.5 | 213.2 | |||||||||||
| Bank of Canada policy rate, year-end (%) | 1.8 | 0.3 | 0.3 | 4.3 | 5.0 | 4.3 | 2.8 | 2.8 | 2.8 | |||||||||||
| 10-year Treasury (%) | 1.6 | 0.7 | 1.4 | 2.8 | 3.4 | 3.4 | 3.1 | 3.0 | 3.2 | |||||||||||
| Note: All percentages are annual averages unless otherwise noted. Core CPI is the CPI excluding energy and food components. f--Forecast. ppts--Percentage points. CPI--Consumer Price Index. Sources: Statistics Canada, Bank of Canada, S&P Global Market Intelligence, and S&P Global Ratings Economics' forecasts. | ||||||||||||||||||||
The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
| Chief Economist, U.S. and Canada: | Satyam Panday, San Francisco + 1 (212) 438 6009; satyam.panday@spglobal.com |
| Research Contributor: | Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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