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The global economic growth backdrop has continued to slow as the lagged impact of aggressive central bank interest rate hikes build continue to build alongside a continued squeeze on household purchasing power from the earlier rise in food and energy prices. Commodity prices are still high but have have edged progressively lower.
The U.S. economy remains an outlier with strong GDP growth through Q3 2023. But households are running out of savings and ‘excess’ labour demand has evaporated with further declines in job openings expected to begin to push unemployment more significantly higher. We continue to expect the U.S. economy to soften in early 2024. GDP edged lower in Europe and was essentially unchanged in the UK over the summer.
Canada’s economy continues to soften as debt payments rise
Canada’s economy passed a tipping point some time ago. A surge in population propped up measures of total economic activity earlier in 2023 – each new arrival boosts both the productive capacity of the economy and consumer demand. But GDP fell 1.1% (annualized) in Q3 despite those tailwinds, and per-person output has now declined for five straight quarters. After-inflation, consumer expenditures per-capita fell to 1% below pre-pandemic levels in Q3.
Rising debt payments and higher fuel and grocery bills have left household purchasing power diminished. And labour markets are softening with employment no longer rising fast enough to absorb a rapidly growing available workforce. The unemployment rate has risen by 0.8 percentage points since April – a magnitude of increase that historically usually only comes in the early stages of an economic downturn. Job openings continue to retrench, down 30% year-over-year as of September.
Household savings are still very high, and that can act as a backstop in times of economic stress. But the cash stockpile is not evenly distributed across income cohorts and is increasingly unlikely to be spent in the near-term. Households typically save more (and spend less) when the outlook is uncertain and consumer confidence fell below the lows of the 2008/09 recession in November. And household savings may be higher in part to accumulate funds among households that will still see significant increases in mortgage payments, including a mortgage refinancing wave coming in 2025. The household saving rate rose to 5.1% in Q3 (still well-above the 2.1% pre-pandemic rate in 2019.)
Slowdown in domestic demand expected to ease as the BoC cuts rates
Consumer spending is expected to remain under pressure in the near-term as rising debt payments and higher food and energy prices continue to soak up purchasing power. Businesses have also been pulling back. Business investment on machinery and equipment fell 14.4% in Q3. For the first time since the pandemic, businesses tracked by the Canadian Federation of Independent Business ranked concerns about demand for their products as a larger factor limiting production/sales than labour shortages. Housing markets have looked wobbly with headwinds from higher interest rates being countered by high rates of population growth and limited supply of homes available.
Central banks have done their job: additional hikes likely off the table
While the near-term economic outlook is not exactly rosy, the good news is that higher interest rates and slower growth are working to ease inflation pressures. The full impact of rate hikes to-date has yet to be felt, and downside remain if the slowdown in labour markets accelerates. Economic data to-date is still tracking consistent with a ‘mild’ downturn by historical standards.
And easing in the breadth of inflation pressures in both the U.S. and Canada combined with softer economic data has increased the odds that the U.S. Fed and the BoC will be pivoting to interest rate cuts in the year ahead. That won’t happen right away – central banks will be cautious about declaring victory over inflation too early. But we expect both the U.S. Fed and the BoC will be shifting to interest rate cuts in the first half of 2024.
Economic outlook to brighten starting in the second half of next year
Once central banks are able to begin easing off the monetary policy brakes, we expect the economy to perk up over the second half of next year. The impact of higher interest rates will continue to ripple through the economy with long lags – see more on the expected impact of mortgage renewals on the household debt payments in 2025 below. But those challenges are likely manageable as long as labour markets are beginning to improve by then. We expect GDP growth will begin to pick up in the second half of 2024 and into 2025.
2025 mortgage renewal wave is large but manageable
Roughly 40% of the outstanding stock of mortgages will have already renewed at higher interest rates by the end of 2023.
But past interest rate increases of 2022/23 will continue to echo into 2025 and 2026 as a wave of 4- and 5-year fixed rate mortgage contracts originated at exceptionally low interest rates during the pandemic renew. Approximately $400 billion worth of mortgages are set to renew in 2025, a large portion of which (about $275 billion) are 4- or 5-year contracts that will be renewing at substantially higher rates.
Still, the actual payment impact from those increased mortgages is manageable – around $4 billion, or roughly 0.3% of current household disposable incomes – as long as the Bank of Canada is able to begin cutting interest rates next year (as is now widely expected) and the economic backdrop is improving.
Lower interest rates will limit (but not prevent) a large payment shock
While the number of mortgages renewing in 2025 is large, the payment shock associated with those renewals is smaller.
Rising conviction in markets that the Bank of Canada will need to pivot to interest rate cuts in the year ahead have already pushed 5-year government bond yields down a full percentage point from peak levels earlier in the fall – and all else equal, lower government rates mean lower interest rates for other fixed rate lending rates across the economy, including mortgages.
Our own interest rate projections still imply 4- and 5-year fixed rate mortgages renewing at about 2 to 2 1/2 percent higher in 2025 – resulting in a payment shock of 20% to 30% for those borrowers, all else equal. But the total dollar amount of the increases still looks like a ‘manageable’ headwind for the broader economic backdrop.
Renewal rates are not significantly (or at all) above OSFI stress test levels
Canada’s mortgage market is highly regulated and borrowers need to qualify for loans at interest rates well above contract rates to ensure resilience to exactly this kind of renewal shock.
Households borrowing at the low rates of 2020 still had to qualify at rates substantially higher than their lending rates (either 2 percentage points above the actual lending rate or the Bank of Canada posted rate, which never fell below 4.79% in 2020.) Most mortgages could still be renewing at below those ‘stress-tested’ levels in 2025 if the Bank of Canada cuts interest rates as expected.
And by 2025, some mortgages will also be renewing at lower rates
Essentially all mortgage renewals across all contract durations since mid-2022 have been at higher rates. But by 2025, a wave of shorter-duration (1-3) year mortgages worth roughly $70 billion will also be renewing at lower interest rates.
The impact of variable-rate mortgage renewals is difficult to predict (the amount that payments adjust when interest rates change in variable rate mortgages varies by bank, and variable rate mortgages can typically switch to fixed rate contracts relatively easily.) But there will also be a large chunk of variable rate mortgages seeing lower payments as the BoC pivots to cuts.
With the BoC expected to begin easing off the monetary policy brakes next year, we expect the unemployment rate will be drifting lower in 2025 and house prices will still be high. Labour income will be growing (alongside still rapid population growth) and households will have accumulated additional equity in their homes. We expect Canadian GDP will still strengthen modestly in 2025 on balance with the unemployment rate drifting lower.
Provincial Outlook
We expect minimal economic growth in Ontario (+0.2%), B.C. (+0.3%) and Quebec (+0.4%) in 2024 as households remain under heavy pressure from high interest rates and a soft US economy weighs on external trade. Though the Prairie provinces won’t be immune to the slowdown, an optimistic investment outlook should keep Alberta (+1.7%), Saskatchewan (+1.6%), and Manitoba (+1.2%) growing at a modest pace. Meantime, a resurgence in natural resource production and partial recovery in construction investment may be enough to lift growth in P.E.I. (+2.1%), Newfoundland and Labrador (+2.0%), and Nova Scotia (+1.2%) in 2024. A weaker trade outlook in New Brunswick (+0.9%), however, is likely to keep growth relatively muted in the year ahead.
BRITISH COLUMBIA – Spending and investment lull to continue
We expect many of the challenges that stunted economic growth in B.C. in 2023 to remain pressure points for the province in the year ahead. Though there’s no telling of what 2024 will bring insofar as natural disasters, high interest rates and strained affordability are poised to keep the spending and investment lull going for a little longer. And with a drop in net new projects, we don’t expect to see a big improvement to the province’s softening labour market either. This should keep B.C.’s overall economic growth at the back of the pack in 2024 (+0.3%).
With many major capital projects past their peak, the investment lull in B.C. is likely to seep into 2024. Completion of the 670 km Coastal GasLink project, and wind down of construction of the Site C dam, Trans Mountain pipeline expansion and LNG Canada’s project in Kitimat represent an investment wrap up of more than $80 billion.As many of B.C.’s mega projects are at or nearing completion, high interest rates stand in the way of bringing more online. In fact, the province’s own quarterly major project inventory (MPI) reported a second consecutive drop in net new projects (by dollar value) in Q1 2023.
Not only does the slim project pipeline make for a soft investment outlook, but it also pinches employment growth expectations for B.C. in the year ahead. Indeed, B.C.’s labour market has experienced the most acute softening of any other province this year. The modest 1.5% growth (y/y) in year-to-date employment has been the weakest of any province. And at 1.8%, the y/y gain in hours worked has been nearly half that of the national average (+3.2%) over the same period.
The housing market also points to continued moderation. Ducking 21% since the spring peak, resales have retracted more than any other province. Despite moderating price growth, high interest rates continue to keep home ownership out of reach for many. We expect this trend to continue over the first half of 2024 as families and investors wait for rate cuts before growing their real estate portfolio.
ALBERTA – Tailwinds moderating in 2024
Though tailwinds from commodity markets and strong population inflows are waning, Alberta is slated to keep its place near the top of our provincial growth ranking in 2024 (+1.7%). It’s relative affordability advantage and impressive growth streak continue to entice a record number of new migrants, keeping upward pressure on aggregate spending, investment, and employment growth. Despite the upside strong demographic trends bring to overall growth, a flourishing population, alone, won’t be enough to shield Alberta’s economy from moderating further in 2024.
Still heavily indebted, Alberta households are starting to feel the pressure of high interest rates. Per capita retail sales are finally down from year-ago levels (at Q3 2023) – confirming underlying softness in the retail spending space. Nonetheless, we expect a booming population will keep overall retail sales growth strong relative to the national average (+4.1%) in 2024.
The province’s red hot housing market has also shown early signs of cooling. Hefty price increases and high interest rates have pushed more buyers to the sidelines in recent months – a trend we see continuing into 2024.
Cracks are beginning to form on the business side as well. After a solid rebound in the energy sector since the pandemic lows, the outlook for the province’s key oil and gas industry is looking more tumultuous. Geopolitical tensions, slower global demand and new GHG emissions policy could be sources of volatility.
The expected completion of the Trans Mountain pipeline expansion (TMX) in the second half of 2024 will open up new markets for Alberta’s oil. This should narrow the price discount at which some provincial producers sell their production.
Construction of Alberta’s first net-zero petrochemical complex is expected to start in 2024. The $8.9 billion investment in Fort Saskatchewan is estimated to create roughly 6,000 jobs during its construction with completion of phase 1 slated for 2027. Besides the investment boost the project provides, the project will strengthen to the medium and long-term employment outlook for the province.
SASKATCHEWAN – Stage set for 2024 rebound
After a tough year for crop production and fertilizer exports, better growth prospects are on the horizon for this provincial economy. Indeed, Saskatchewan is set to buck the weakening trend in 2024 as the outlook for potash improves and (hopefully) better weather supports a more favourable growing season. We see these tailwinds bringing economic growth up to 1.6% in 2024 – well ahead of the Canadian average.
Conflict on the world stage has added volatility to commodity markets over the last year. Indeed, Canadian potash shipments have been falling after shipments from Russia and Belarus resumed. Port strikes in B.C. also significantly hampered export capacity, contributing to the overall dip in potash production over the last few quarters.
Production of other minerals and exports of oil and gas haven’t been much stronger given the softening global demand. But on the heels of the sluggish natural resources sector in 2023, we see things picking up slowly in 2024. Interest rate cuts are likely to spur demand for key commodities, and markets are likely to rebalance as inflation expectations settle.
In fact, the bright outlook has prompted another $6.4 billion investment from BHP for stage 2 of the Jansen potash project. With stage 1 already at peak construction, further development of the world’s largest potash mine bodes well for the province’s employment and investment outlook. A continued inflow of investment dollars and rebound in fertilizer prices should set Saskatchewan up to outperform most other provinces in 2024.
MANITOBA – Slowing its stride
This past summer’s drought in Manitoba turned out to be less detrimental to the province’s agricultural sector than we had anticipated. Significantly upgraded crop production estimates from Statistics Canada prompted us to upwardly revise our 2023 real GDP projection to 1.7% – a 0.3 percentage-point increase from our September outlook. Still, this represents a notable moderation from the 3.3% recorded in 2022. We expect the slowing trend to extend into 2024. As businesses and consumers keep a tight grip on their purse strings amid high costs, real GDP growth is poised to moderate further to 1.2%.
Manitoba’s economic diversity will be a valuable asset in the year ahead as the province faces a soft North American economic landscape. We see strengthening in agricultural production and a rebound in utilities to more than offset weaker construction activity and moderating manufacturing exports.
The more positive outlook for utilities largely rests on a rise in water reservoir levels from unusually low levels in 2023 that undermined hydroelectric generation. Moreover, the ongoing energy transition and growing population base continue to attract investment to the utilities sector in Manitoba – including eight new hydroelectric turbines at the Pointe du Bois Generation Station and a new transmission network in the Portage la Prairie area. Construction of these projects are slated to commence in 2024 and 2025, boding well for the short and medium-term investment and employment outlook.
The province’s key manufacturing sector, however, isn’t likely to see the same improvement in 2024. As demand at home and among major trading partners wanes, we see manufacturing shipments tapering off from the highs recorded earlier in 2023.
ONTARIO – Gearing down
Though Ontario’s growth is expected to come in close to the Canadian average this year, a steep moderation is likely to bring it to the back of the pack in 2024. Not only will high interest rates continue to hamper housing market activity and spending next year, but slower growth in the U.S. is also poised to dampen the manufacturing outlook. Record investment in EV battery plants will partially offset the weakening trend, however, manufacturing developments in southwestern Ontario won’t be enough to fully counteract the broader softening. As such, we have real GDP growth in Ontario pegged at just 0.2% in 2024, down from 1.1% in 2023.
With billions of investment dollars pouring in, Ontario’s auto sector is likely to generate substantial economic activity for the province. The $5 billion Stellantis battery plant in Windsor is already well underway as prep work for Volkswagen’s $7 billion new battery cell manufacturing plant in St. Thomas continues to ramp up. And after finalising a deal with the federal and provincial government this year, construction at Umicore’s $2.1 billion battery materials factor in Loyalist is set to peak in 2024.
In term of production, Ontario’s manufacturing sector is in for a bumpier ride. As high interest rates force more Canadians to adjust their consumption, Ontario’s manufacturing sector isn’t likely to show the same strength as it did in 2023. In fact, manufacturing sales have plateaued since summer. And with the U.S. flirting with recession in the early part of 2024, we expect Ontario’s manufacturing exports to face stiff headwinds in the coming months.
The province’s 2024 outlook isn’t looking much stronger on the residential side either. After bearing the brunt of the housing market downturn in 2023, we expect high interest rates will keep housing market activity relatively soft in the period ahead. This should keep residential construction flat at best.
Quebec – Bruises to take longer to heal
The Quebec economy is heading into 2024 with plenty of bruises. The year that’s passed hasn’t been kind with massive wildfires, high interest rates, the sharp increase in the cost of living, and lately, large labour strikes weighing heavily on activity. Quebec, in fact, is one of only two provinces likely having fallen into a mild recession in 2023 (Newfoundland and Labrador, the other). We expect 2024 to be kinder, though just barely. And any noticeable improvement in the outlook might come only in the back half of the year once cuts in interest rates provide relief and trading partners turn their situation around. We project annual growth to remain sluggish overall, inching higher from 0.3% in 2023 to 0.4% in 2024.
Business capital investment is poised to be a bright spot in the year ahead. Major battery component and manufacturing projects have broken ground in 2023 and construction will ramp up in 2024. These projects—totaling $11 billion—will take one or more years to complete. The provincial government expects a further $4-billion worth of additional projects to be announced. Together these investments will position the province as a global player in this space by 2025-2026.
We also see scope for residential construction to pick up from low levels in 2023. There are early signs the rebound is already taking shape with housing starts trending upward since the end of the summer. That said, high interest rates and soft pre-construction sales are likely to limit the extent of the recovery.
It will take longer for other parts of the provincial economy to gather momentum. Consumer-sensitive sectors will continue to contend with hunkered-down households, many of whom still struggling with high costs of living and increasingly concerned about their job situation. Some slack will build in the labour market—we expect job vacancies to drop further and the unemployment rate to rise to 6.1%—which will restrain wage growth. Quebec’s export sector, for its part, will contend with softer US demand as the economy south of the border hits a dry spell over the first half of 2024.
NEW BRUNSWICK – Weaker trade dims growth outlook
New Brunswick’s economy has geared down significantly from the pandemic recovery’s high point. Indeed, this provincial economy has already posted one of the steepest slowdowns in growth between 2021 (+5.3%) and 2022 (+1.1%) of all provinces. Though strong in-migration and relatively low debt burdens support a robust household sector, headwinds from a softening global economy are picking up and holding back provincial exports. As such, we’ve downgraded our 2023 forecast to 1.1% from 1.4%. We expect the provincial economy to decelerate further to 0.9% in 2024, making New Brunswick the only Maritime province to experience a further slowdown in the year ahead.
While we see strength on the consumer side largely sustained into 2024, challenges loom on the business side. Slower homebuilding and softer foreign demand have taken a toll on the province’s lumber production and manufacturing exports. Despite a projected bounce back in housing starts at home, lacklustre homebuilding in the U.S. could offset potential gains for New Brunswick’s forestry industry.
Though New Brunswick households hold the lowest debt servicing ratio in the country, consumer spending won’t be enough to buoy the province from moderating further in 2024. With limited private investment, we see economic growth remaining quite muted in New Brunswick.
NOVA SCOTIA – Investment boost strengthens growth outlook
Recent data suggests Nova Scotia may be struggling more in 2023 than we initially thought. Deteriorating affordability has weakened the housing market, pushing year-to-date resales down in Nova Scotia more than any other province (+20% y/y). And though non-residential construction investment has been strong in 2023, softness on the residential side has been a drag on total construction investment. Manufacturing shipments have also come down as the province’s largest export markets brace for recession. All in all, we think growth will be quite a bit softer than our September forecast. At 0.8%, Nova Scotia’s economy is likely to trail behind the Canadian average in 2023 before making a modest rebound in 2024 (+1.2%).
Though population growth is slated to come down from record levels recorded in 2023, we expect a continued inflow of international and interprovincial migrants to be a tailwind for Nova Scotia in the year ahead. Aside from supporting strong retail sales (+3.9%), the influx of working age individuals is poised to support moderate employment growth (+1.2%) and a steady rebound in the housing market.
Despite holding relatively low debt servicing ratios, rapidly rising home prices and interest rates have significantly deteriorated affordability in Nova Scotia. We see buyer appetite picking up gradually in the back half of 2024 once interest rate cuts accumulate.
The construction investment outlook is also bright on the non-residential side. Construction of EverWind’s $1 billion wind farms project is set to commence in the Fall of 2024, supporting the uplift in non-residential construction investment. In addition to near-term benefits for this provincial economy, the $1 billion investment is intended to create new export markets for Nova Scotia’s hydrogen – boding well for the province’s longer-term outlook.
PRINCE EDWARD ISLAND – Set to gather even more momentum
2024 is likely to be a slightly stronger year for P.E.I. Not only does robust population growth and easing inflation pressure support a robust outlook for household spending, but a ramp up in construction is also slated to contribute to overall growth. Though P.E.I. won’t be recovering from a particularly hard year, the province is likely to be one of three that buck the weakening trend in 2024. At 2.1%, our forecast calls for real GDP growth in P.E.I. to, once again, top all other provinces in the year ahead.
Unlike elsewhere in the country, tailwinds from strong demographics have yet to show signs of waning on P.E.I. Indeed, year-to-date retail sales growth (+7.1% y/y) is still more than three times stronger than the national average (+2.2%).
Retail spending growth is even positive on a per capita basis. We see the buoyant consumer spending as a testament to interest rate resilience among islanders. And with interest rates coming down in the second half of 2024, we see consumer appetite for spending only getting stronger. For this reason, we expect retail sales growth on P.E.I. to stay well-ahead of the Canadian average in 2024 (+5.5%).
But the household sector isn’t the segment that’s been holding back growth in recent quarters. Lacklustre construction activity – largely due to acute labour shortages – has continued to hamper construction investment. Despite solid demand, the annual change in housing starts has been one of the weakest in the country (-15% YTD). And on the non-residential side, P.E.I. is seeing the same shortcomings.
Though high interest rates and the wind down of Hurricane Fiona rebuilding projects have undoubtedly contributed to the construction investment lull in recent quarters, more than 60% of construction business have cited labour-related obstacles as a leading concern over the next three months (at Q3 2023). As a greater share of the labour force ages into retirement, persistently tight labour markets are likely to be a continued challenge for P.E.I.
NEWFOUNDLAND & LABRADOR – Energy sector to kickstart recovery
Alongside the oil production dip, a dimmer outlook for the province’s mining sector and construction investment are raising the odds that Newfoundland and Labrador’s economy will contract for a second consecutive year in 2023 (-2.0%). Better growth prospects, however, are likely on the horizon. As of November 2023, all four offshore oilfields were back into operation. A brighter outlook for the province’s key mining sector is also pencilled in for the back half of 2024 as a recovering global economy spur demand for commodities. Strength in the natural resources sector is raising the odds that Newfoundland and Labrador will be one of the few provinces to buck the weakening trend in 2024 with a growth rate of 2.0%.
Recent data suggests that the economic downturn in Newfoundland and Labrador likely dragged into 2023. Not only did slowing global demand put downward pressure on mineral prices, but equipment malfunction and maintenance downtime significantly disrupted mining operations, restraining the province’s mining exports by an estimated 13% in 2023. At the same time, a delayed return of the Terra Nova oilfield put a large dent in oil production.
And though Newfoundland and Labrador’s population has beat historical rates of growth, it didn’t experience the same boom as other provinces. More moderate rates of population growth put less upward pressure on aggregate demand, allowing the economic weakness to show through more clearly in 2023.
But things are already looking up for the province. For the first time in four years, all four offshore oil vessels returned to production in the last quarter of 2023 – boding well for Newfoundland and Labrador’s key energy industry in the year ahead. The provincial government estimates the Terra Nova refit will produce 70 million barrels of oil over the next decade. Even if the vessel produced only 3.5 billion barrels in 2024, the uptick would support a conservative 5% increase to total oil production– all else equal. And with first oil from the Bay du Nord project expected in 2025, we’re expecting 2024 momentum to carry on into the following year.
Things are likely to improve on the household side as well. A ramp up in the natural resources sector and emergence of the wind-hydrogen industry keep downward pressure on the province’s unemployment rate. In fact, we’ve already seen a large decline to the unemployment rate amidst the resurgence of these projects. Given the relatively low household debt service ratio among Newfoundland and Labrador households, the labour market improvement should be enough to boost retail sales growth in 2024 (+3.7%).
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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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