Canada’s economy outlook 2024—In like a lamb

Canada’s economy will start the year on a very soft footing. Households across the country are still dealing with the effects of monetary tightening. The Bank of Canada’s key lending rate peaked in July of 2023, but the impact on the economy has yet to be fully felt. High lending rates have had an immediate impact on the cost of financing big ticket items such as cars or appliances, but roughly 60 per cent of mortgage holders have yet to renew at the higher rates. This means that in 2024, mortgage renewals will consume a greater share of monthly incomes and continue to cause pain for many households.

Inflation and high financing costs have eroded affordability for many Canadians. This along with concern about future job prospects has caused consumer confidence to hit recession lows. The situation is showing up in real per person spending, which we expect will drop by 1.6 per cent this year. Such a decline is typical of recession, but the downturn is offset by a phenomenal surge in population growth. Over the past 2 years, the number of non-permanent residents in Canada has swelled to record levels. This includes temporary foreign workers, international students, and refugees, most of whom obtain work permits and participate in the labour force. Population growth more than double pre-pandemic norms will persist this year, helping to maintain positive gains in total consumer spending, despite the weakness at the household level.

Canada’s central bank is not alone in its efforts to hammer back consumer spending to lower inflation. The good news is there are clear signs that monetary policy is working. Over the past few months, inflation readings dropped significantly in Europe, the United States and Canada. And with inflation nearing the target ranges of between 1 and 3 per cent, there is hope that central banks will start to let up on the brakes and lower interest rates. The U.S. Federal Reserve announced in December that it expects to lower rates three times this year, with more to come in 2025. Canada’s central bankers remain more prudent and have not yet signaled rate cuts. Still, we anticipate that the Bank of Canada’s key lending rates will begin to come down starting in the second half of 2024. However, while the Bank’s overnight lending rate rose from just 0.25 per cent during the pandemic to 5.00 per cent where it sits now, we expect it will be lowered, but only gradually and bottom out at 2.25 per cent in mid-2025. This reflects our belief that financing costs will remain significantly higher than pre-pandemic times, putting a burden on debt financing for households, businesses, and governments.

While much of the focus in the media has been on the affordability challenges that households are facing, small and large businesses in Canada are also dealing with a challenging environment. In addition to higher debt financing costs, businesses face higher input costs, higher rental costs for commercial and industrial space and rapidly rising wage bills. Over the past two years, businesses have gone on a hiring spree, trying to close the gap on job vacancies and surging demand as the economy reopened, but the situation has recently turned sharply. Economic growth has essentially stalled since the spring of 2023, but employers have continued to hire or hold on to workers with the expectation that economic growth will rebound. This has led to a sharp erosion in corporate profits, which will undoubtedly shake up the business sector through the first part of 2024, especially as the impact of CEBA loan repayments comes due.

Overall, though, we believe that a successful return to low inflation in Canada is the most likely scenario for this year. Success on the inflation front will help rekindle consumer and business confidence and spending. While Canada’s economy in 2024 is unlikely to go out like a lion, we do expect economic growth will strengthen throughout the year, especially later this year as interest rates come down.

Pedro Antunes