Deloitte Canada’s recent economic outlook report sheds light on the Canadian economic landscape, painting a nuanced picture of both the challenges we face and potential for new economic growth. Despite persistent headwinds such as sticky inflation, escalating business closures, and a concerning uptick in mortgage defaults, Deloitte’s analysis suggests that Canada may manage to sidestep a recessionary spiral. This cautious optimism is rooted in several factors, including anticipated interest rate adjustments (rate cuts – a big if), and a hopeful trajectory for economic recovery, possibly materializing in the latter half of 2024.
A pivotal aspect influencing Canada’s economic trajectory has been the proactive measures undertaken by the Bank of Canada to address soaring inflation rates. Beginning in March 2022, the Bank initiated a series of interest rate hikes, significantly raising the country’s key interest rate from near-zero levels to the current five percent. However, the language has shifted away from the fight against inflation to potential interest rate cuts, possibly as early as June or July. This anticipated monetary policy shift is poised to recalibrate the economic landscape, potentially bolstering consumer confidence and stimulating investment activities and a new real estate boom.
Despite these glimmers of optimism, Deloitte’s report maintains a pragmatic outlook for Canada’s economic performance in the near term, suggesting a continued state of economic inertia, particularly during the initial half of 2024. Projections indicate a modest real GDP growth of approximately one percent for the year, with a more substantial rebound expected in 2025, reaching an estimated 2.9 percent growth rate. These forecasts are contingent upon various underlying assumptions, including robust GDP expansion in the United States, sustained alleviation of inflationary pressures, forthcoming interest rate adjustments, and a steady influx of newcomers contributing to demand dynamics within Canada’s economy.
Recent data from Statistics Canada underscores the complexities of Canada’s economic landscape, with January witnessing a modest uptick of 0.6 percent in GDP followed by a preliminary estimate of 0.4 percent growth in February. However, the report underscores that the trajectory of the economic recovery remains intricately intertwined with the future trajectory of interest rate adjustments, underscoring the critical importance of continued moderation of inflationary pressures.
The persistent challenges posed by elevated housing costs emerge as a significant impediment to achieving sustained economic stability, with Canadians grappling with renewed mortgages at higher rates, consequently exacerbating the burden of shelter expenses for both homeowners and renters alike. Wage pressures continue to persistently outpace inflation rates, coupled with a lack of productivity increases, continue to drive up unit labor costs for businesses, further contributing to inflationary pressures.
Despite the overarching economic uncertainties, Deloitte’s report offers a glimmer of hope by spotlighting the resilience exhibited by Canada’s labor market, albeit with a tempered outlook for employment gains in 2024. Concurrently, household spending is expected to remain subdued during the initial months of the year, as consumers navigate the challenges posed by the escalating cost of living.
Looking forward, Deloitte’s analysis anticipates a more favorable economic landscape in the subsequent year, underpinned by lower interest rates, a reinvigorated economy, and the unleashing of pent-up consumer demand. However, lingering concerns persist regarding the trajectory of business investments, with Deloitte highlighting a worrisome deceleration in investment activities, exacerbated by elevated interest rates dampening investor confidence and limiting expansion prospects. In contrast to the Canadian scenario, the U.S. economy has demonstrated remarkable resilience amidst the backdrop of interest rate hikes, albeit with a potential moderation in growth anticipated in the coming months. Deloitte projects a positive yet tempered outlook for the U.S. economy, with real growth rates projected at 2.4 percent in 2024 and 1.4 percent in 2025, underscoring the intricate interplay between monetary policy decisions and broader economic dynamics.