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Headwinds from higher interest rates and a slowing global economy are building. Canadian GDP edged 0.2% lower in Q2 of this year and early reports are pointing to another decline in Q3. Some factors that weighed on output in Q2 will prove ‘transitory’—including disruptions due to wildfires and a strike by federal workers in April. But there are other indications that a long-expected ‘mild’ economic downturn may have already begun. Indeed, economic growth already looks dramatically softer in the context of a surging population. On a per-person basis, Canadian GDP has now declined for four straight quarters.
The 0.5 percentage point increase in the Canadian unemployment rate over the last four months is the largest outside of the pandemic since the 2008/09 recession. Since the 1970s, there have been just six periods when the jobless rate rose by that much in such a short timeframe prior to this year—and four of them were during recessions. This time, the rise in unemployment has come via slower hiring (relative to surging population and labour supply growth) rather than faster firing. Though employment growth has slowed, it was still up 19,000 per month over the last four months. But the number of job openings is drifting lower, signaling that labour demand is flagging.
Excess savings (and labour demand) have been exhausted in the U.S.
The U.S. economy has been remarkably resilient and is on track to post solid growth in Q3 alongside very low unemployment. But U.S. households have been spending out of excess pandemic savings that are now almost fully depleted. Credit conditions continue to tighten. And consumer delinquency rates (while still low) are trending higher despite historically strong labour markets.
‘Excess’ labour demand has also shrunk. Though the unemployment rate changed little over the last year, the job opening rate has fallen sharply—to a point where the ratio of job vacancies to the unemployment rate (often called the Beveridge curve) is now at more ‘normal’ levels. Job openings continue to fall, and it is increasingly likely that further slowing in labour demand will begin to push unemployment higher.
The global economy is slowing down
Economies around the world are also losing steam. GDP growth in Europe was slow over the first half of the year and unemployment in the UK is beginning to rise. The manufacturing outlook globally has darkened, with manufacturing PMI surveys across most economies pointing to a pullback in activity. The Chinese economy looks wobbly, even controlling for a long-expected acceleration in demographic headwinds tied to a rapidly aging population.
Central banks won’t jump quickly to interest rate cuts
Bank of Canada officials are reiterating their one and only policy mandate: to hit a 2% inflation target. And price pressures remain ‘sticky’ in Canada. Amid a softening in GDP growth and labour markets we expect the BoC to stay on the sidelines, holding rates steady into 2024.
The U.S. inflation/growth backdrop is the reverse of Canada’s, with economic growth remaining exceptionally resilient, but with inflation pressures easing more significantly in recent months. In our view, that washes out to the same net monetary policy response on both sides of the border, with the Fed also holding interest rates at current levels into 2024.
Near-term risks to both BoC and Fed interest rate projections are tilted higher rather than lower. And we expect both central banks were spooked too much by the spike in inflation over last two years to pivot back interest rate cuts as swiftly as they might have in the past. We look for the first cut to the overnight rate from the BoC in Q3 of next year.
Canadian consumers are reining in spending
Consumer spending was essentially unchanged in Q2 and we look for a further slowdown in both Q3 and beyond. Spending on goods has softened significantly with retail sales volumes falling 3% at an annualized rate in Q2. Though spending on services has been stronger, it’s also showing signs of slowing down.
Aggressive interest rate increases over the last year and a half will continue to ripple through to consumers, pushing household debt payments (and delinquency rates) higher. Business investment has also shown signs of slowing and housing markets have cooled again after bouncing back sharply in the spring when the BoC temporarily paused interest rate increases.
Provincial Outlook
Economic growth is moderating across almost all provinces (except Newfoundland & Labrador) this year. With decades-high interest rates already constraining spending and investment, natural disasters and unfavourable growing conditions have posed an added challenge. We expect some of these setbacks to hit Quebec (+0.5%) and B.C. (+0.5%) harder, keeping both provinces at the back of our provincial growth rankings for 2023 and 2024.
By contrast, Alberta (+2.2%) is likely to take these challenges in stride, outgrowing all other provinces in 2023. And in the Prairies, a strong energy sector and booming population are expected to partially offset the disruptions of spring wildfires and a weak crop outlook.
Out east, a wave of in-migration will greatly stimulate household spending and employment growth in most of the Atlantic region. This will contribute to real GDP growth expected to exceed the national average in P.E.I. (+1.7%), Nova Scotia (+1.5%), and New Brunswick (+1.4%).
Though we expect Manitoba (+1.4%) to struggle with poor growing conditions this year, a resilient manufacturing sector is likely to keep this provincial economy in the middle of the pack. Similarly, strength in Ontario’s manufacturing sector has partially offset weaker spending and investment—setting the province up to narrowly outpace the Canadian average at a rate of 1.1%.
The outlook for Saskatchewan, however, isn’t as rosy. Poor prospects for agriculture—which accounts for a larger share of GDP—has brought down our growth projection for the province this year to just 0.8%. We now expect real GDP growth in Saskatchewan to underperform most provinces in 2023.
Though Newfoundland & Labrador’s economy is expected to rebound from last year’s contraction, growth (+0.7%) will remain shy of the Canadian average. An optimistic mineral outlook and potential revival of the energy sector, however, has set the stage for stronger growth in 2024 (+1.4%).
BRITISH COLUMBIA – A rocky year
Massive forest fires and labour strikes at 30 ports are among the unexpected events that rocked British Columbia’s economy this year. We believe their impact will leave a negative mark on overall growth, which we have downgraded slightly to 0.5% from the 0.6% noted in our previous forecast. The revision will leave B.C. real GDP growth trailing most other provinces in 2023 (and on par with Quebec). Still, we ascribe the bulk of the slowing from last year not to these unfortunate events, but to a dimmer outlook for household spending and capital investment. Higher interest rates are hitting British Columbians especially hard given their elevated debt levels. This pressure is likely to persist well into 2024—keeping growth on a slow track.
One upside surprise has been the solid rebound in the real estate market. Home resales and prices have picked up more quickly than we anticipated since spring. Still, this rally is unlikely to continue as prospective buyers contend with extremely poor affordability conditions.
On the surface, spending at retail stores is holding up so far in 2023. But that’s largely due to a growing number of consumers. In fact, B. C.’s population growth is currently running at a four-decade high of 3.1%, sustaining aggregate demand for goods and services. On a per capita basis, retail sales are trending lower, falling 2.4% from their year-ago level in the second quarter. We expect soaring debt service costs will force more consumers to rethink their purchasing plans in the period ahead.
A softening job market may accelerate this changing sentiment. There are growing signs that earlier labour market tightness is rapidly easing. Job vacancies are down 28% from a year ago—the steepest fall among the provinces. And B.C.’s unemployment rate is up a percentage point since the end of last year.
Weaker construction investment (-12% in the last 12 months) is partly to blame. Construction employment has plummeted 17% since January. With major projects past their peak, we expect capital investment spending to continue moderating in the near term.
ALBERTA – Back in the saddle
Alberta isn’t shielded from the many headwinds slowing down Canada’s economy, but it continues to stand out for its relative vigour at this point in the cycle. We expect it to rank first among the provinces this year in terms of growth (+2.2%) —a spot it’s held many times in the past. This would represent a slight 0.2 percentage-point downward revision from our previous forecast (due to a more pessimistic crop outlook in the Prairies.)
Along with the manufacturing and real estate sectors, the province’s oil and gas industry is contributing to Alberta’s economic upswing. Oil production had a solid start to the year. Wildfires caused some disruptions this spring, though some evidence suggest these were short-lived. The industry is also boosting investment in the province—largely in the form of new wells drilled—amid sustained demand and still-favourable commodity prices. Oil and gas investments are now above pre-pandemic levels in nominal terms.
Along with Alberta’s relative affordability advantage, broadly positive economic prospects have been a big draw for newcomers to the province. Alberta welcomed more than 45,000 interprovincial migrants (on a net basis) and nearly 100,000 international immigrants (net) last year. And its population growth rate, which now rivals that of P.E.I., shows few signs of slowing. We expect the influx of migrants will contribute to solid growth in consumer spending this year (+6.4%). Though the broader economic cooldown is set to moderate retail sales growth in 2024, we still have growth for this indicator pegged at 3.5% in Alberta— well above the Canadian average (+2.1%).
Statistics Canada’s 2023 projection for field crops indicates a marked decline from last year. At 14%, the drop in annual production (in metric tonnes) is unlikely to go unnoticed. Still, strength among other industries should cushion the province’s economy from slowing too aggressively—and a bounce back in the agricultural sector next year could tilt our 2024 growth projection to the upside.
SASKATCHEWAN – Hot, dry weather takes a toll
Unfavourable growing conditions will drag production of key field crops in Saskatchewan to their second lowest level in more than a decade, according to the latest government modelling. This represents a disappointing turn of events for a provincial economy that’s still recovering from a deep three-year slump between 2019 and 2021 (including a massive drought in 2021). We have slashed our 2023 growth projection from 2.0% to just 0.8% as a result. The revision has moved Saskatchewan down several spots in our provincial growth rankings this year. On the other hand, we have upgraded our 2024 forecast to 2.2% on the assumption crop conditions will be more favourable.
Also weighing on growth this year is a weaker outlook for some of the province’s key minerals. Already beset by slowing global demand, Saskatchewan’s mining sector hit another rough patch this spring. Labour disputes at critical ports in B.C. upended overseas shipments for weeks. And mining production (excluding oil and gas extraction) dropped 24% in the first half of 2023 compared to the same period a year ago.
While mineral prices have come down substantially from their 2022 highs, they continue to float above pre-pandemic levels. This maintains a favourable environment for capital investment to flow into the province. Capital expenditures in the province are estimated to grow by more than $3 billion (+21%) from 2022, more than $2 billion of which is expected to come from the mining and energy industries.
MANITOBA – Losing steam
An expected decline in agricultural production and slowing momentum for key exports have dimmed the outlook for Manitoba’s economy this year. We now expect growth to moderate to 1.4% from a robust 3.9% in 2022—a downgrade of 0.5 percentage points from our June forecast. This would still outpace the overall Canadian economy, though. We think Manitobans’ relatively low sensitivity to interest rates (thanks to lower-than-average household debt) and a booming utilities sector will cushion growth from a deeper slowdown.
Muted construction investment and slowing consumer spending have also contributed to a manufacturing trend that’s been flattening from a 2022 high. We expect little change in this trajectory until consumers and businesses loosen their purse strings—something we don’t expect to see until the Bank of Canada begins cutting rates in 2024.
Weaker crop production projections have cast a shadow over Manitoba’s agricultural sector this year— contributing to the province’s overall weakening. The drop in estimated crop yields comes alongside steep production (including labour) cost increases (+12% year-over-year) for key products like canola and grain corn.
The energy transition—alongside a surging Canadian population—has driven up demand for electric power. As a large hydro electricity-generating province, Manitoba has experienced robust production increases. Expected completion of the St. Vital Transmission Complex this fall and continued restoration and expansion of the Portage la Prairie area have already helped boost capacity. Energy-generating production is still up 15% year-to-date compared to the same period in 2022. And the province is gearing up to at least double it’s generating capacity over the next two decades. Though strength in this sector won’t be enough to offset the broader weakening trend for this provincial economy, it is expected to be a strong suit for Manitoba in the future.
ONTARIO – Momentum is moderating in 2023
As expected, Ontario’s economic momentum is losing steam. After soaking up 475 basis points worth of interest rate hikes (since March 2022), and decade-high levels of inflation, consumer spending has finally waned. Amid higher borrowing costs, residential investment in the province has also dropped to decades low. We expect a more resilient manufacturing sector to partially offset these downturns, keeping our growth projection for Ontario in 2023 at 1.1%. As momentum slows further, Ontario’s economic growth is expected to trail behind all other provinces in 2024 (+0.2%).
For residents, another 50 basis points worth of hikes this June and July effectively halted the housing market revival in its tracks. Amid escalating debt burdens and deteriorating affordability, we’ve seen residential investment continue to nosedive—after picking up even more speed earlier this year. We expect shrunken profit margins to keep housing starts muted in 2023 (94,400) before ramping up to 98,800 in 2024. Fuelled by falling interest rates and government incentives, next year’s expected housing start activity would represent the largest addition since the mid-1980’s.
QUEBEC – Walking a thin line
Quebec’s economy has lost substantial momentum this year. It likely contracted slightly in the second quarter amid mine closures, markedly softer construction activity, and a stalling manufacturing sector. We expect the province to continue to walk a thin line between positive and negative growth through the remainder of this year, and into 2024. That growth will probably clock in at just 0.5% overall in 2023— down materially from 6.0% in 2021 and 2.6% in 2022—and further decelerate to 0.4% in 2024.
One clear outcome of the slowing pace is an easing labour market tightness. Job vacancies and employment are down so far this year—falling 36,000 and 7,000 , respectively, since January—with all the loss in employment among full-time workers. The unemployment rate is trending higher, reaching 4.3% in August from a modern-day low of 3.9% at the start of this year.
This erosion in the jobs outlook, mixed with the sharp increase in the cost of living, is beginning to take a toll on consumers. Quebecers’ spending at retail stores has weakened since spring, especially on things like sporting goods, furniture, building materials and garden equipment. And they’ve been pulling back a little at food services and drinking places too. We expect that toll to grow heavier in the short-term while high interest rates maintain intense pressure on borrowers in the province.
Wildfires in June also hammered the province. Several mines were forced to suspend or halt production. And though most have resumed operations, it’s unlikely the province will be able to make up the loss over the second half of the year.
That pressure is plainly visible in the housing market where demand—while recovering from pandemic lows—continues to be soft. Housing construction has slumped as a result. Residential construction investment was off 31% in the first half of this year, and housing starts were down 40%. We believe a further (slow) recovery in the housing market and policy efforts to narrow the supply gap will reinvigorate home building activity to some degree next year.
NEW BRUNSWICK – Staying the course
New Brunswick’s economy has kept a fairly good pace this year. A booming population and relatively light household indebtedness have supported solid gains in employment and consumer spending. Though softer demand for key exports provides some offset, we expect areas of strength to keep New Brunswick’s economy growing steadily in 2023 at a rate of 1.4%. This would be off just 0.4 percentage points from the 1.8% advance recorded in 2022 and ahead of our 1.0% projection for Canada.
The influx of interprovincial and international migrants has been especially positive for the province’s labour market. Newcomers have diversified the talent pool, invigorating several industrial sectors. Employment growth within professional, scientific and technical services, for example, is up 12% annually on a year-to-date basis – well above the 4.0% growth recorded for total jobs. Newcomers have also helped ease labour shortages. Job vacancies were down 12% in the first half of 2023.
The historic wave of in-migrants has brought challenges too. It’s testing the capacity of existing infrastructure—including housing—to accommodate demand. And it’s coming at a time when high interest rates are holding back new private residential construction and when the public sector is keeping a lid on capital project spending.
While relatively steady this year, overall growth in the economy is distinctly moderating—like all other provinces. We expect this to continue going forward. We think the drop in job vacancies signals softer employment gains ahead. And manufacturing sales (in nominal terms) have dropped 13% year-to-date from the same time last year—the sharpest downturn of any province. We expect softer demand in this key sector to mute growth even further in 2024.
NOVA SCOTIA – Coming down from a post-pandemic boom
Nova Scotia’s economy hasn’t strayed far from our expectations this year. With few surprises, we’ve left our 2023 growth projection at 1.5% in 2023—0.5 percentage-points ahead of the Canadian average. Strong demographic trends and relatively low indebtedness have kept spending and investment chugging along and employment growth positive. But as the post-pandemic population boom settles and high borrowing costs weigh more heavily on consumers, we expect Nova Scotia’s real GDP growth rate to slow materially in 2023. The above-mentioned strengths, however, should keep growth from easing much more in 2024 (+1.2%).
Like most other provinces, high interest rates have hindered building efforts across the province this year. Down 5.2% year-to-date, Nova Scotia posted a relatively mild decline in housing starts compared to the same period last year.
This slowdown came alongside softening residential investment. Down 9% year-to-date from the same period in 2022, the mild contraction in investment signals sensitivity to growing home ownership costs.
The weakening trend in housing starts, however, isn’t likely to last. Sustained demand and government investment in new housing supply initiatives are expected to bring starts up to 6,400 this year—a 12% increase over the level posted in 2022.
Similar slowing trends have also been observed on the business side. But this isn’t anticipated to last long. As the province gears up for its $1B green hydrogen project, EverWind, we’re likely to see a ramp up in investment. Employment growth (+0.6%) is also likely to outpace most other provinces when construction of the project is set to commence in 2024.
PRINCE EDWARD ISLAND – Growth to ease amid drop off in investment
Although this year has brought its fair share of challenges for P.E.I., the island’s economy has held up relatively well. Population growth hit a rate of 4.6% in Q2 (year-over-year), outpacing all other provinces— and sustaining spending and employment. But that hasn’t shielded the island from other pressures. The impact of interest rate hikes has taken a toll on the construction and housing sectors. This, alongside federal workers strike and disruptions to the lobster harvesting season, have forced the P.E.I. economy to downshift by a gear or two this year. We expect real GDP growth on the island to slow to 1.7% in 2023 before making a modest comeback in 2024 (+2.1%).
High rates of population growth and relatively low levels of household debt have kept retail sales growth going at a robust pace. Up 4.5% year-over-year, P.E.I.’s Q2 retail spending growth is among the strongest in the country (next to Alberta’s).
Though retail spending hasn’t yet faltered, consumers’ appetites for larger ticket items has dropped off. And residential investment on P.E.I. has continued to nosedive (plunging 46% year-to-date), since the Bank of Canada began hiking rates last spring. In fact, the decline in residential investment on P.E.I. has been the steepest of any province. And despite regulatory amendments introduced earlier this year to promote housing supply, housing starts have been sluggish.
Meantime, the cold and windy spring lobster season isn’t likely to boost growth this year. Sustained demand for the product, however, leaves opportunity to make up for idle catches this fall. The ongoing wave of in-migrants—still stronger than in most provinces—is expected to keep growth on P.E.I. near the top of our provincial ranking into 2024.
NEWFOUNDLAND & LABRADOR – Lacklustre energy sector stunts provincial growth
Output from the province’s key oil industry continued to decline over the first half of 2023—raising the likelihood of another soft year for the Newfoundland & Labrador economy. While we expect growth to turn positive after a 1.7% contraction in 2022, the pace will likely be a tepid 0.7%. This would keep the province at the back of the pack again in 2023. Prospects for a resurgence of the Terra Nova offshore oil vessel and a more favourable mineral outlook would invigorate the growth rate in 2024, which we expect will double to 1.4%.
A lacklustre energy sector has solidified our real GDP growth expectations for the province. Newfoundland & Labrador’s Terra Nova vessel has been out of commission for nearly four years. And while a timeline for the vessel’s return to production has yet to be announced, Suncor has officially removed the Terra Nova oil platform from its 2023 agenda. The vessel did begin its journey back to open water mid-August, bringing a resurgence of production closer to fruition and tilting growth prospects for Newfoundland & Labrador to the upside in 2024.
Although we expect Newfoundland & Labrador to sit at the bottom of our growth ranking for a fourth consecutive year, bullish sentiment around the province’s mining sector is likely to tip real GDP growth into positive territory in 2023. Though mineral prices have come down from last year’s high, the ongoing energy transition and infrastructure investments are poised to keep demand for the province’s key minerals at sufficient levels. This has effectively brought capital investment intentions to a four year high.
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As RBC Chief Economist, Craig Wright leads a team of economists providing economic, fixed income and foreign exchange research to RBC clients. Craig is a regular contributor to a number of RBC publications and is a key player in delivering economic analysis to clients and the media through the Economics Department’s regular economic briefings.
Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.
Robert Hogue is an Assistant Chief Economist, responsible for providing analysis and forecasts on the Canadian housing market and provincial economies.
Rachel Battaglia is an economist at RBC. She is a member of the Macro and Regional Analysis Group, providing analysis for the provincial macroeconomic outlook.
Carrie Freestone is an economist at RBC. She is a member of the macroeconomic analysis group and is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.
Abbey Xu is an economist at RBC. She is a member of the macroeconomic analysis group, focusing on macroeconomic forecasting models and providing timely analysis and updates on economic trends.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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