The economy has proven more resilient than expected in 2023. In both the U.S. and Canada, GDP continued to grow in Q1 as consumer spending held despite higher interest rates and prices. Low unemployment rates have persisted, and inflation is still running above central bank target rates. Concerns about the U.S. regional banking sector have calmed down, at least for now, and the next fight over the U.S. debt limit has been kicked down the road to after the 2024 elections.
The war in Ukraine continues, but energy costs have fallen back, and global supply chain pressures have further eased. China’s economic growth is slowing, but by now this should be expected as demographic headwinds from an aging population build.
Overheating labour market conditions and a large stockpile of household pandemic savings in Canada might delay the full impact of tighter monetary policy. But the surge in interest rates over the last year will continue to take a toll. Higher prices and interest rates already ate up all of the increase in Canadian household after-tax wage incomes in 2022. And they look on track to do so again in 2023. We continue to think the most likely base case outlook includes at least ‘mild’ recessions in Canada and the United States—although we now expect declines in GDP to start a quarter later (Q3 and Q4 2023) than previously expected.
Strong data today could delay but won’t prevent a ‘bumpy’ landing
The return of inflation to central bank target rates (2%) is still contingent on a softening economy. If recent momentum continues to surprise on the upside, then the Bank of Canada and other central banks will need to hike interest rates more than expected. The Bank of Canada already ended the pause in interest rate hikes that started in January this year with a 25-basis point hike in June. We don’t think the U.S. Fed will follow suit for its meeting next week given earlier communications. We do however expect both central banks to move key policy rates higher again by 25 bp in July, unless economic data deteriorates more than expected before then. The only true ‘soft landing’ scenario is one where inflation pressures slow quickly back to target rates without a deterioration in the economy, and that still looks unlikely.
So even near-term positive growth surprises will only delay, rather than prevent, a ‘bumpy’ landing. Even as higher prices and interest rates soak up a larger share of purchasing power, consumers in Canada continue to spend. Housing markets look like they’re past their bottom with home resales and prices rebounding in the spring, and the ratio of demand to available listings shifting in favour of sellers in arising share of markets. Our own tracking of card data showed spending on necessities and other discretionary goods flattening out. On the other hand, spending on local entertainment like dining out has remained very firm.
Cracks are forming under the surface
Still, although unemployment rates are exceptionally low, there are signs that labour demand is weakening. Job openings are down almost 20% from peak levels in Canada, and by 16% in the U.S. Fewer workers are quitting their jobs—normally a sign that confidence in labour markets is fading.
The impact of interest rate hikes since early 2022 has yet to fully flow through to borrowing costs. But consumer delinquency rates are already rising. And with average mortgage interest costs running almost 30% above year ago levels in Canada, we expect more softness to show up as these loans are gradually renewed at higher rates. In Canada, the debt servicing ratio—or the share of household disposable income eaten up by debt payments—will likely rise to record levels over the second half of this year.
Tighter credit markets adding to rate headwinds
Although concerns about the U.S. regional banking sector have subsided, banks are still broadly reporting tighter lending conditions. Canadian credit markets have been more stable this year but have also seen lending conditions tighten.
Persistent labour shortages mean businesses will be slower than usual to forego productivity-enhancing investments, but we still expect some softening in this arena going forward. In the U.S., where lending conditions have tightened more significantly, growth in factory shipments has slowed, commercial and industrial loans have started to edge lower.
Price pressures to continue to ease, but more slowly for services
Lower energy costs are pushing headline inflation rates lower both at home and abroad. As of May, gas prices in Canada were still high but running almost 20% below year-ago levels. Home heating costs have also fallen sharply (just in time for summer) with natural gas and fuel oil costs also down from a year ago when Russia’s invasion of Ukraine sent energy costs soaring.
Food price growth remains high but appears to be past its peak. The surge in grocery prices over the last year was driven by a combination of choked supply chains, soaring transportation and labour costs, and higher agriculture commodity prices. All of these factors have now eased. Global shipping costs have plunged and local transportation (road and rail) costs are increasing more slowly. Agriculture food commodity prices are down 15% from their 2022 peak, leaving them closer to levels last seen in summer 2021.
Though broader inflation pressures have also eased, they’re still too firm for central banks to relax. The BoC’s preferred core measures have been running at around a 3 ½% annualized rate—still above the top end of the 1% to 3% target range.
Immigration will prevent a crash, but not a decline
In Canada, surging population growth is helping to fill more jobs. The unemployment rate hasn’t budged in 2023 from the exceptionally low 5.0% at the end of 2022. And employment increased by a quarter of a million over the first four months of 2023. That’s boosting economy-wide output, providing higher wage and salary income to help offset rising debt and inflation costs.
Structurally higher population growth makes it tougher for the economy to contract by adding to overall consumption. That’s particularly true in housing markets, where it’s tougher for new supply to respond quickly to surging demand. We still expect the impact on household purchasing power from higher prices and interest rates to ultimately push GDP lower, but strong underlying population growth makes it more likely that downturn will be ‘mild.’
Despite a relatively strong start to the year, we expect cooler winds to moderate growth in all but one province (Newfoundland & Labrador). While slumped investment is likely to keep economic growth in B.C. (+0.6%) and Quebec (+0.6%) constrained this year, a lagging oil and gas sector in Newfoundland & Labrador (+0.7%) and soft consumer spending in Ontario (+1.1%) will keep these provinces growing—though behind the Canadian average (+1.3%). Though they’ve moderated from their 2022 highs, strong commodity markets are poised to keep Canada’s Prairie provinces at the top of this year’s growth ranking—with Alberta taking the lead (+2.4%), followed by Saskatchewan (+2.0%) and Manitoba (+1.9%). Above trend population growth out east will continue to support a vibrant labour market and strong spending—keeping real GDP growth in P.E.I. (+1.7%), Nova Scotia (+1.5%), and New Brunswick (+1.4%) in the middle of the pack.
BRITISH COLUMBIA – Hitting a soft patch
It will take more than a rebound in the housing market to prevent B.C.’s economy from softening significantly this year. Large capital projects that fueled tremendous activity in recent years are now past their peak or winding down, cooling the construction sector. Higher interest rates still weigh on B.C. consumers—the most indebted in the country. In fact, increased financial pressures have already started to weigh on consumer spending since the fall. We expect headwinds to be stronger in B.C. than in most parts of the country, sending the province to the back of our growth ranking this year. We expect real GDP in B.C. to expand by just 0.6% in 2023—down from the 3.6% rate of growth recorded last year.
Despite a softening economic environment, B.C.’s tight labour market continues to keep wages growing at the fastest pace in the country (+6.3%). And job vacancy rates are lingering well-above pre-pandemic levels. The strong wage gains, however, haven’t been enough to keep consumers from tightening their belts. No doubt rising debt service costs and dire housing affordability struggles are the overriding factors holding back many British Columbians. Trailing behind all other provinces, we project retail sales to crawl this year (+0.4%).
Higher interest rates also reduce businesses’ appetite to invest in new projects. The near completion of large existing projects (including Kitimat LNG, Highway 91/17) will cause capital investment spending to dip. According to Statistics Canada’s latest CAPEX survey, businesses intend to invest a total of $50 billion in 2023 in the province, a drop of 3.3% from 2022. B.C. is one of only two provinces where a decline is expected. We anticipate the cooling in construction to contribute to a general easing in the labour market—pushing B.C.’s unemployment rate up modestly from 4.6% in 2022 to 5.3% in 2023.
ALBERTA – Taking the lead
Alberta’s economy is on a roll. Last year, it grew at the second-fastest pace (+5.1%) in the country, and the start of 2023 looks no different. The province’s key energy sector is maintaining strong momentum (despite some disruptions caused by wildfires), job creation remains solid, the population is booming, and consumers have yet to let up. While we expect growth to moderate over the remainder of this year, the weight of higher interest rates isn’t likely to have the same impact on Alberta’s economy as other provinces. We expect Alberta to lead our 2023 growth ranking with a rate of 2.4%. The spring’s massive forest fires, however, pose a downside risk.
Fueled by roaring commodity markets, Alberta’s economic upswing has drawn a record number of inbound migrants, pushing population growth to among the fastest in Canada last year (+3.7%). Aside from driving up consumer spending, (retail sales rose a solid 8.8% from a year ago in the first quarter of 2023), the inflow of migrants has helped address some labour shortages, rebalancing the province’s job market. Alberta has recorded one of the stronger employment gains (+3.7%) in the country so far this year. Yet its unemployment rate has drifted slightly higher since the middle of 2022, which has contained wage increases (+3.1%) to some degree.
Despite sustained household consumption, Alberta’s inflation rate has remained the lowest in Canada over the first quarter of this year. A sharp increase in April (+4.3% y/y), however, has brought it back to middle of the pack. The provincial government’s Affordability Payment Program (providing up to $600 to seniors, families with children under 18 and other Albertans in need) should help offset part of the increased cost of living. These transfers, however, shouldn’t get in the way of Alberta’s inflation returning to the 2% target by 2024.
SASKATCHEWAN – Stronger investment keeps economic wheels turning
Saskatchewan’s economy is back on its feet. It outgrew all other provinces in 2022—after a two year-long slump—and it continues to show signs of vigour so far this year. Robust commodity markets—and promising longer-term prospects for them—are attracting large investments in mining, which fuels substantial spinoff activity in other sectors. But the province won’t be immune to the broader cooling in the national and global economies. After a sharp increase last year, the near-term outlook for mining production has dimmed. Commodity prices have come off cyclical highs, prompting provincial producers to trim output. Indeed, mineral production is down 10% from year-ago levels. We believe this will be a temporary adjustment. As such, we forecast growth to slow significantly to 2.0% this year from a near decade-high of 5.7% in 2022. This would still place Saskatchewan near the top of our 2023 growth ranking.
As Canada’s potash-producing province, Saskatchewan strongly benefits from growing global demand for fertilizers. Russia’s invasion of Ukraine last year further solidified the province as the world-leading supplier of the commodity, setting in motion another round of massive investments to expand capacity. We think this will be a growth catalyst for years to come. And the boost couldn’t have come soon enough. Despite last year’s bounce back, Saskatchewan’s economy still hasn’t fully recovered from the back-to-back contractions brought on by pandemic lockdowns in 2020 and drought in 2021. In fact, we expect economic activity this year to finally rise above its 2018 level.
MANITOBA – Stiffer headwinds on the horizon
A strong upturn in the agricultural and manufacturing sectors is fueling a surge in Manitoba’s exports. Key domestically-oriented sectors also continue to run hot thanks to pent-up consumer demand and solid non-residential construction activity. These have more than offset a slump in residential investment for now. But we believe that offset will get slimmer as external and domestic demand cools. We forecast provincial economic growth to slow from 3.9% in 2022 to 1.9% this year—ahead of the national average of 1.3% for a second-straight year.
Manitobans have taken interest rate increases in stride. Their relatively low indebtedness softened the blow, such that they remained focused on making up for lost time when spending avenues were curtailed earlier in the pandemic. But we expect this pent-up demand will soon wear thin. Consumers are likely to become more cautious as evidence of economic weakness emerge. Early signs include price declines for key farm crop products (such as canola and wheat) from last summer’s highs and employment growth coming in on the softer side lately (up just 1.0% from a year ago in April). This is especially the case in the agricultural sector, where the number of workers is down a staggering 32%. The outlook for agriculture, however, is only dimmer when set against last year’s staggering rebound (real GDP in the sector soared 22%). Still, we think that ongoing geopolitical tensions are likely to keep demand for Manitoba’s exports at a healthy level in the year ahead, contributing to ongoing modest growth in the province.
ONTARIO – Economy set to lose steam
Ontario’s economy built quite a head of steam in the past couple of years, which continued to power growth in the early months of 2023. Higher interest rates did cool the housing market dramatically and dampen consumer spending, but their broader impact has yet to be felt. We think that’s about to change. We expect stiffer debt service costs to curb demand for Ontario goods and services both at home and abroad over the remainder of this year. Overall, we expect growth to moderate significantly to 1.1% in 2023 from 3.6% in 2022.
Heavily indebted, Ontarians were among the first to react to the Bank of Canada’s aggressive rate hikes. Consumer spending levelled off in the latter half of 2022, but household debt did not. In fact, mortgage liabilities have ballooned nearly 10% last year—bringing Ontario’s household debt-to-disposable income ratio up another 8 percentage points to a staggering 203%. As interest rates reach a 22-year high, we expect debt service payments to take up a growing share of households’ budget. This, we think, will get many Ontarians to further tighten their belts. The fact that retail sales grew at one of the slowest rates in the country in the first quarter (up 1.7% from a year ago) is consistent with that view.
Medium-term, the construction of several large-scale capital projects will fuel brisk non-residential construction activity over the coming years. Many of these are related to electrical vehicle and battery production (including massive EV battery plants in St. Thomas and Windsor), as well as transportation infrastructure. Capital investment intentions are up a modest 4.6% this year.
QUEBEC – Stagnation to set in
The near-term outlook is neither cheerful nor grim in Quebec. Instead, we think the provincial economy has entered a period of stagnation that may include a slight contraction later this year. Slumping residential investment and moderating activity in the manufacturing and resource sectors have already slowed momentum since the middle of 2022. Services industries will be the next ones to get caught in the headwinds. Some of these services (e.g. professional and technical services, and healthcare) may have plateaued earlier this year. We project minimal growth of 0.6% overall in 2023, marking a sharp easing from the solid 6.0% and 2.6% advances recorded in the past two years, respectively.
The picture is mixed at this juncture to say the least. Despite the softening in some sectors, other parts of Quebec’s economy continue to exhibit impressive strength. The labour market for example is still extremely tight (with the 4.1% unemployment rate effectively at historical lows) and households for now are keeping their purse strings wide open. All the while, earlier hard-hit industries like transportation services, arts and entertainment, and accommodation and food services are making further meaningful progress toward full recovery. But the slack in these industries is rapidly diminishing. And the boost from the provincial government’s one-off transfers to help vulnerable Quebecers cope with higher costs of living will also soon wear off. We see these factors pointing toward broader weakness over the second half of this year.
One sector that’s likely to hold up well in the year ahead is non-residential construction. Businesses plan to boost capital spending by more than 10% in Quebec to a record-high of $60 billion in 2023 with almost two-thirds of outlays allocated to the construction of non-residential structures. Public infrastructure (including transit, roads, and tunnels) will continue to take centre stage but spending by manufacturers and utilities will also represent significant shares.
NEW BRUNSWICK – Facing domestic and external challenges
Economic growth decelerated markedly last year to 1.8% from 5.9% in 2021, dragged by declines in the manufacturing sector and key service industries. We see scope for further modest deceleration in 2023 as consumers at home and abroad come under increasing pressure. We forecast the provincial economy to grow by 1.4% this year.
Softer external demand and price volatility for key provincial export commodities are taking a toll on the province’s (nominal) exports this year. Merchandise exports edged 0.1% lower in the first quarter compared to the same period last year. Those trade headwinds in turn continue to weigh on the provincial manufacturers whose sales fell 3.2% in the first quarter. We don’t expect any material turnaround for the sector over the remainder of this year while the U.S. and Canadian economies head into a recession.
New Brunswick’s labour market, however, remains strong at this stage. Job creation is still trending higher and unemployment continues to creep down, reaching a new all-time low of 5.8% in March. While a wave of migrants has helped grow and rejuvenate its labour pool, the province still struggles with a relatively old labour force. The median age in New Brunswick (45.7 years) is the second oldest Canada after Newfoundland and Labrador.
NOVA SCOTIA – Wave of newcomers to buffer the economy
Although Nova Scotia’s economy last year grew at half its (frantic) pace in 2021, the performance could hardly be called weak. The 2.6% rate achieved still far exceeded the average 1.9% in the five years prior to the pandemic. Record levels of in-migration did wonders for consumer spending and residential investment—and got the province’s labour market in better shape. But while favourable demographic trends will continue to boost the provincial economy this year, we expect a cooling global economy and higher interest rates to prove more challenging. We project growth to moderate further to 1.5%—still outside recession territory—amid weakening demand for exports and domestic goods and services.
There may be early signs the downshifting in the economy is loosening labour market conditions. Unemployment in Nova Scotia has jumped 26% since hitting a four-decade low in January, lifting the jobless rate to the third-highest level (6.3%) among the provinces in April. There are also fewer unfilled positions as job vacancies are down 15% from a year ago.
We’d expect any sustained softening in the job market to set off a negative feedback loop—causing Nova Scotia’s consumers to increasingly restrain their spending. Nonetheless, strong demographic trends are poised to keep the economic hit on the milder side. Among other benefits, the wave of newcomers has helped diversify the industrial make-up of the province. It has fueled tremendous growth in services industries (led by professional, scientific and technical services) and further reduced dependence on the resource sector—helping to enhance economic resiliency.
P.E.I. – Population boom continues
For the first time since 2018, P.E.I.’s growth rate lagged the national average last year at 2.9%. Downturns in the construction, fishing and wholesale industries, as well as slower growth in the agricultural and healthcare sectors held back the economy’s pace. But it wasn’t a weak outcome by any means. Following the 2021 surge, P.E.I. is finally seeing a return to the average rate seen in the five years prior to the pandemic. Record in-migration has helped support solid job creation and keep consumers in a spending mood. We expect recessionary conditions in North America to further moderate real GDP growth on P.E.I. this year to 1.7%.
Construction activity continues to soften at this stage from historically elevated levels in 2021. Residential investment is correcting the most—housing starts were down 22% from a year ago in the first quarter. Non-residential development hasn’t shown much resilience either with year-to-date investment in industrial structures falling more than 40% from the same period last year. As high interest rates and persistent affordability pressures continue to weigh on construction, we see little in the way of turnaround through the remainder of this year.
The province has faced a number of challenges so far this year. The sighting of two endangered whales this spring has disrupted the lobster harvesting season, threatening to lower catches for many crews. And the federal worker strike in April heavily disrupted the public administration sector. With more than half of the island’s public service employees offline over a two-week period, labour disruptions could leave a mark on P.E.I.’s growth this year. Nonetheless, we expect the province’s overall standing to be back above the Canadian average this year. A bright outlook for tourism and strong population growth—P.E.I.’s population is currently rising at the fastest rate (+4.3% in the first quarter of 2023) in the country—will largely make up for slack in other areas of the economy.
NEWFOUNDLAND & LABRADOR – More setbacks in 2023
Newfoundland & Labrador was the only provincial economy that contracted in 2022 as the energy sector declined for a second consecutive year. Recent developments in the province’s key industries suggest Newfoundland & Labrador may be in for a softer year in 2023 than we previously anticipated. A dimmer outlook for oil production, in particular, now casts a shadow over the recovery from last year’s decline in activity. As such, we have downgraded our growth projection for this year to 0.7% from our prior forecast of 1.6%.
Newfoundland and Labrador’s oil sector is off to a disappointing start. Oil production fell to its lowest level in the first quarter of 2023 (19 million barrels) since mid-2017. Plans to resume production at the Terra Nova offshore oilfield in the second quarter of 2023 were nixed—with no future date for extraction in sight. And with the West White Rose projects still two years away, the production gap is unlikely to be filled before the year is up.
But the setbacks in the oil industry shouldn’t completely overshadow better prospects in other sectors. There was $5.3 billion pledged to investment in capital projects in the province this year—a 7.1% increase from 2022. A sharp increase in mining industry expenditures (up 22%) will help stimulate the economy—supporting positive employment growth (+2.1%) despite the long-awaited completion of the Muskrat Falls hydroelectric project. With mineral prices still sitting well above their pre-pandemic levels, we expect the mining sector to be a bright spot for the province in the year ahead.
Detailed forecast tables:
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 responsible for providing analysis and forecasts on the Canadian housing market and provincial economies.
Claire Fan is an economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.
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.
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