As the world economy presented a mixed bag of results in 2023, Canada’s economic trajectory has been characterized by a ”textbook” slowdown, according to a recent report by TD Economics. This analysis offers a deep dive into the current state of Canada’s economy, its prospects, and the policy responses expected from the Bank of Canada.
TD Economics anticipates the Canadian economy to hit its lowest point in the first half of the upcoming year. The report underlines that the pace of economic recovery will largely hinge on central banks’ efforts to normalize monetary policy. In a comparative context, the U.S. economy outperformed expectations significantly this year. However, the report predicts a slowdown, with the Federal Reserve likely to cut rates in the latter half of the year, aiming for a ”soft landing”.
For Canada, the situation appears more challenging. The economy has been slowing down in response to higher interest rates, a move initiated to manage inflation. The report notes considerable debate about whether Canada was already in a recession until the data for the second quarter showed slight economic growth.
“Canada may have skirted a recession, but the economy is running at a very anemic pace,” TD Economics states. Consumer spending has been particularly affected, with a notable pullback in discretionary spending as a result of the Bank of Canada’s interest rate hikes. Real consumer spending is expected to grow modestly by 0.6% in the fourth quarter, with a slowdown anticipated in the first half of the next year.
Housing markets have also felt the pinch of rate hikes, experiencing a greater downturn than initially anticipated. This cooling is seen as part of a broader trend of fiscal conservatism that is extending to businesses, with investment spending in retreat and projected to remain subdued.
In contrast, government spending is expected to buoy growth, with most levels of government showing reluctance to cut back on spending. Despite these measures, Canada’s economic growth is projected to slow from 3.8% in 2022 to 1.1% this year and further to 0.5% next year, heightening recession risks.
Inflation remains a complex issue for Canada. The report highlights that Canada’s inflation metrics are cooling less rapidly than those of other advanced economies, particularly in core goods prices. This persistent inflation, partly attributed to a weaker Canadian dollar and a less competitive retail environment, suggests that the Bank of Canada will need to remain vigilant.
However, TD Economics forecasts enough progress in inflation control by spring for the Bank of Canada to start reducing interest rates. This move is expected to support growth in the latter part of the year, with a projected improvement in real GDP growth to 1.5% in 2025.
This analysis by TD Economics paints a picture of a Canadian economy navigating through turbulent waters, with careful monetary policy adjustments poised to play a crucial role in steering the country toward steadier economic growth in the coming years
