Outlook for Canadian economy in 2024

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Investors should not expect the Canadian economy to perform wonders in the first half of 2024, but the situation may stabilize or even improve in the last part of the year, experts say.

“It’s really a tale of two halves,” says Benjamin Tal, Deputy Chief Economist at CIBC Capital Markets Inc.

“Right now we’re already in a technical recession, or at best a soft landing. Capital spending is negative already and our GDP is close to zero. Regardless of what you call  it, the economy is going nowhere right now,” Tal says.

Will Canada’s economy improve?

CIBC predicts negative growth in the first quarter of this year, with growth rising gradually to 2 per cent in the fourth quarter.

BMO’s Canadian Economic Outlook foresees zero growth this quarter, but agrees that a 2 per cent rise in Canada’s GDP by the fourth quarter is in the cards.

A soft landing — inflation being tamed without chilling the economy into a deep decline — is quite possible, says Doug Porter, Chief Economist at BMO Financial Group.

“In Canada, the consensus is that we may grow over the year by 0.5 per cent — that’s a weak economy, not quite a recession, but really sluggish. The biggest surprise from the end of last year, though, is that the economy held up as well as it did,” he says.

“Looking ahead, I actually think there’s a fair chance that we’ll be surprised on the positive side, particularly in the United States, if their economy outperforms. That could spread to the Canadian economy,” Porter says.

Porter, Tal and others agree that the sharp rise in interest rates since March, 2022, is keeping capital spending and the housing market down, as the Bank of Canada and other central banks grapple with taming inflation.

While the jury is still out on the battle against inflation, signs are that it’s retreating to manageable levels, says Pedro Antunes, chief economist for the Conference Board of Canada.

Will inflation go down?

“Perhaps the worst is behind us. We are seeing signs that the slowdown we’ve experienced in the last year, and which we’re likely to see now in the first quarter, is part of an intended policy by the Bank of Canada, to keep down inflation, and it seems to be working,” Antunes says.

“Inflation numbers are coming down quite dramatically in the United Kingdom and Europe, and that bodes well for here,” he says.

According to Trading Economics, the annual inflation rate in November, 2023, was 3.1 per cent, stubbornly above market expectations and high enough to cause the Bank of Canada to consider keeping interest rates high.

Both CIBC and BMO anticipate that inflation can be tamed to around 2 per cent by the end of the year — the Consumer Price Index rate that the Bank of Canada considers acceptable.

Will interest rates go down?

Interest rates are another story. The Bank of Canada’s key lending rate is still 5 per cent; while the bank has stated that it “remains prepared to raise the policy rate further” to keep battling inflation, there is widespread market expectation that rates will start to come down mid-year.

But rates will only come down if there are clearer signs that inflation is under control, Porter says.

“The markets are expecting rate cuts, but I think they may be a bit ahead of reality. We’re heading in the right direction on inflation, but I don’t think we can take it for granted that it’s going to go away quietly. I’m encouraged but I don’t think it’s time to declare victory just yet,” he says.

“I don’t think central banks could make it more clear that they’re going to be cautious about easing [rates] too quickly,” he adds. For investors, “it may be time to play defence.”

Tal agrees that high interest rates are the number one factor in keeping the economy slow right now. The effects are really kicking in now from consecutive hikes in the bank rate from near zero in March, 2022, to the rates today, he says.

Pandemic savings cushion disappearing for consumers

“Until recently, consumers were shielded by having excess savings that they could spend,” he says. The savings accumulated as consumers avoided spending during the pandemic.

“There was an estimated $165 billion in excess savings held by consumers in Canada. This is down to near zero now, which means that consumers aren’t shielded from the expenditures they have, such as mortgage payments,” he explains.

Without that savings cushion, “the impact of higher rates is kicking in now,” Tal says.

Housing and labour markets

Many consumers are also hesitant to spend because they’re facing new mortgage rates in the coming year.

“In Canada, we’re going to see a significant reset — people are going to have to renegotiate and they’ll be paying much more. They know this and they’re starting to rebuild their savings,” Tal says.

Even if housing markets are slow, housing affordability is still going to continue to be an issue, Antunes says: “The solutions aren’t quick. It’s going to take time to build homes and for prices to readjust.”

Canada is still attracting skilled immigrants, Porter adds. This eases pressure on labour markets but it only increases demand for housing, he says.

Elections and uncertainty in the U.S. and globally

Another consideration for 2024 is that this is, as the Economist says, “the year of the election,” with as many as 4 billion people going to the polls in 76 countries.

While Canadians are not expected to go to the polls nationally until 2025, votes around the world can affect investment and spending, Tal says.

“Whenever you have elections, you have government spending. Also in the short term, elections keep investment down, because everyone waits for the outcomes.”

The most significant election for the Canadian economy may the U.S. presidential election in November, Antunes says. But whatever the outcome, the effects of this election won’t really take hold until next year.

“There are longer risks, in terms of trade policy, for example. But I don’t think we’ll a big impact on the economy in 2024,” he says.

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