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The global economic growth backdrop has shown signs of improvement, but Canada’s economy continues to underperform. Interest rate cuts are welcomed by highly indebted households, but won’t spur growth until next year.
Gross domestic product across the euro area and the U.K. picked up early in 2024 after contracting over the second half of 2023 and business surveys suggest that growth momentum carried over into Q2. The manufacturing sector globally has remained soft but has improved and the service sector continues to expand in most regions.
The U.S. economy is showing signs of softening with GDP growth tracking below 2% over the first half of 2024 for the first time since 2022 and the unemployment rate has edged higher. Still, U.S. labour markets have remained resilient on balance and signs of a reacceleration in inflation earlier this year will keep policymakers cautious about easing monetary policy too quickly even with a downside surprise in May price growth. We continue to expect the U.S. Federal Reserve won’t be in a position to start cutting interest rates until late this year.
Canada’s economy continues to underperform
In Canada, per-capita GDP has continued to decline as the economy grows more slowly than the population. Per-capita output is running 3% below 2019 levels and is little changed from a decade ago. That represents a 10% underperformance relative to a 7% increase in per-capita GDP in the United States, but the silver lining is that inflation pressures also slowed enough for the Bank of Canada to cut interest rates for the first time in four years in June.
The sharp underperformance of the Canadian economy argues for further gradual interest rate cuts this year from the BoC, even with the Fed on hold. But that doesn’t mean the adjustment of households and businesses to higher interest rates is over as past interest rate increases continue to filter through to higher debt payments.
Much of Canada’s broader economic growth challenges are tied to decades-long economic underperformance that has more to do with an inefficient regulatory backdrop and other headwinds to business investment than the short-run stance of monetary policy. These challenges are discussed in more detail in our new Growth Project.
BoC cuts will still leave interest rates at elevated level
The BoC’s June interest rate cut followed reductions from Switzerland and Sweden’s central banks, and the European Central Bank followed with a 25 basis point interest rate cut soon after.
The key Canadian overnight rate is still at 4.75%—well above the 2.25% to 3.25% range that the BoC estimates would have a neutral (neither helping to accelerate or decelerate economic growth) impact on the economy. We assume another 75 basis points of BoC cuts this year, but that will still leave the level of interest rates above those neutral levels and subtract on net from economic growth, just by less than currently.
We look for Canada’s economy to continue to soften on a per-person basis in the near term before ticking back to positive growth in 2025—led by strengthening consumer spending into next year as interest rate headwinds ease. Business investment is on track to decline for a second straight year in 2024.
Household debt servicing costs will continue to rise
We estimate that about $200 billion in four and five-year fixed-rate mortgages in total are coming up for renewal this year (roughly a fifth of the outstanding balances of those mortgages), with another $275 billion in 2025. Almost all of those will be renewing at higher interest rates even with assumed BoC interest rate cuts.
The increase in mortgage payments looks manageable when measured against household incomes that have also grown substantially from pre-pandemic levels – and some variable rate and shorter-duration mortgage holders could start to see some relief. The expected payment shock this year will still be large for individual households impacted, but accounts for a relatively small 0.2% of total Canadian household incomes, according to our estimates. But they will keep debt payments rising in the near term even as interest rates begin to fall.
Surging U.S. economy has fewer than normal spillovers to Canada
A long and impressive U.S. run of economic resilience has broadly continued but the spillover effects to Canada have been limited. The U.S. manufacturing sector, where links to the Canadian economy are the closest, has been soft with declines in output for three straight quarters to Q1. U.S. economic growth has, instead, been driven by consumer consumption and government spending—both of which don’t have much of an impact on demand for Canadian exports.
The strength of the U.S. economy won’t be sustained. Large government deficits will remain a big tailwind, but households have largely run out of savings accumulated during the pandemic. Delinquency rates are rising, and GDP growth has slowed to below 2% in the first half of 2024. The unemployment rate is still low, but is up 0.6% from post-pandemic lows. And firmer price growth in the U.S. earlier this year means the Fed will have to wait longer before cutting interest rates. We don’t expect the first rate cut from the Fed until December.
Lower interest rates won’t solve all problems
Interest rate cuts will help improve housing affordability for new buyers in the near term, but a structural undersupply of housing will keep a floor under home prices. Slower population growth after planned federal government caps on non-permanent resident arrivals next year will slow both demand and supply in the economy. Overall, interest rate cuts in the near term will do little to help address Canada’s long-running productivity challenges.
Provincial Outlook
We’re keeping Ontario (0.5%) and B.C. (0.7%) at the back of our 2024 provincial growth ranking. Clearer signs of an economic slowdown are emerging for Canada’s most indebted households as the lagged impact of high interest rates keeps spending activity muted. Quebec’s economy (0.8%), on the other hand, seems to be turning a corner with record planned capital investments this year. Still, the modest recovery will be on the heels of a nearly flat year for economic growth—keeping three of Canada’s largest provincial economies growing slower than the rest.
A resurgence in fertilizer markets and completion of the Trans Mountain Pipeline expansion project should keep the Prairie economies growing middle of the pack with all three outpacing the national average of 1%.
In the eastern provinces, a resurgence in natural resource production is expected to pull economic growth in Newfoundland and Labrador (+2.0%) back into positive territory after two consecutive negative years for growth. Robust household spending and government investment are poised to boost growth in P.E.I. (+2.1%) and Nova Scotia (+1.6%) in 2024. Conversely, declining capital expenditures are expected to weigh on real GDP growth in New Brunswick (1.1%).
BRITISH COLUMBIA – Consumer resilience is running out
British Columbia’s economy grew more than expected in 2023— up 1.6% from a year ago according to early estimates from Statistics Canada. But that momentum is running out. We expect the sharp drop in capital spending intentions will be a major drag on growth this year. Lower interest rates will bring some relief to households and businesses, but this will do little to appease the intense prevailing affordability tensions in the province. We expect stretched affordability to keep highly indebted residents under pressure in the year ahead. Though some of the tailwinds from 2023 have prompted us to upwardly adjust our 2024 forecast—from 0.3% to 0.7%, B.C. is still expected to remain near back of the pack in terms of growth this year.
Upside surprises in natural resource extraction (especially natural gas), engineering construction, and transportation shielded the economy from a more dramatic slowdown in 2023. Explosive population growth also kept household spending afloat, boosting labour force and employment growth despite virtually no change to the number of active businesses and a slowdown in major construction projects. At the same time, solid wage gains and earlier accumulated savings spurred activity, cushioning the housing market as it corrected further.
Moving forward, capital expenditures are set to drop 5.3% in 2024—interrupting three consecutive years of strong increases. The entire decline is attributable to a $5 billion (27%) spending reduction by the transportation and warehousing industry—which includes pipeline transportation—after the completion of the Trans Mountain Pipeline Expansion Project.
Things aren’t looking much better on the household side either. Though B.C. consumers hold the heaviest debt burden of any other province—leaving residents particularly sensitive to interest rate increases—we’re not confident interest rate cuts will stimulate the B.C. economy much this year. We think intense affordability tensions will keep economic activity muted in some important sectors—like real estate and construction. Given these sectors typically account for a quarter of B.C.’s real GDP, muted activity will likely be a material drag on real GDP growth in 2024.
Moderating population growth is also less likely to provide the same consumption and labour market tailwinds as seen in recent years. Not only is the province still recording a negative outflow of interprovincial migrants (many of whom are hopping over to booming Alberta, which has a material affordability advantage over B.C.), but the new international student cap and temporary foreign workers targets are projected to slow population growth in B.C (and Ontario) more than any other province.
ALBERTA – A brighter economic outlook
Alberta’s economy grew slightly less than expected last year. With most of the softness behind us, however, this provincial economy is likely to kick into higher gear in 2024 (1.7%). Households and businesses—which took past interest rate hikes in stride—have already amped up spending activity in anticipation of rate cuts. We see this momentum picking up further as the Bank of Canada continues to ease monetary policy over the back half of 2024. A slight pickup in oil prices should help as well.
The widely anticipated lift from Alberta’s growing headcount and a relatively stable oil market outlook didn’t reap the expected rewards for the natural resource sector or construction—constraining growth to just 1.5% in 2023. But we see things improving this year.
Signs of economic recovery in some key Asian markets are boding well for the province’s oil industry—and the tide is turning just as the Trans Mountain Pipeline expansion project was completed. The first TMX shipment is en route to China after oil started to flow through the pipeline in May. The pipeline should help Alberta form new export partnerships in the year ahead, offering a boost to GDP.
Weather conditions were dry going into spring and summer, prompting an evacuation of Alberta’s major oil town in May. Another hot and dry start to the season keeps the threat of potentially larger wildfires than last year on the table.
The relatively favourable commodities outlook and growing population have yielded ample employment opportunities. Business activity seems to have kicked into higher gear, evidenced by a substantial increase in active businesses in recent quarters with sustained business growth over the last two years.
The household sector is showing strength as well. The optimistic economic backdrop and affordability advantage in Alberta are attracting residents from B.C. and Ontario as well as from abroad—supporting a quick housing market recovery. Home prices are currently growing at the fastest pace in Canada. Housing starts have also been strong this year—trends we expect will continue over the remainder of 2024.
SASKATCHEWAN – Clearer signs of economic rebound emerge
No real surprises came out of 2023 real GDP numbers for Saskatchewan. Growth was cut by three-quarters last year to 1.6% from the robust 6% recorded in 2022, and, as expected, we’re seeing clearer signs of a recovery ahead.
We anticipate a better commodities outlook will keep non-residential construction investment rising, which should be positive for the labour market. A stronger-than-anticipated housing market recovery and an anticipated rebound in crop production have prompted a slight upward revision to our 2024 growth forecast from 1.6% to 1.7%.
Demand for potash is continuing to recover, boding well for Saskatchewan’s key fertilizer industry. Markets appear to be adapting—with new trade partnerships popping up after conflict among major global producers created supply uncertainty. Saskatchewan’s year-to-date potash production is already off to a good start, increasing 17% from Q1 last year. We see this momentum carrying over the remainder of the year as price stability and improved affordability keep demand growing.
Agricultural production is generally expected to recover in 2024 after drought took a toll on the industry last year. The latest crop report indicated crop development was in the normally expected range for this time of year. We’re still cautious about another weak crop yield this summer, given the unseasonably hot and dry weather from the El Niño weather pattern, which has already set off severe wildfires in the middle of the province. For now, we don’t see this completely counteracting strength in other areas of the economy.
We still expect things to pick up on the household side too, despite a weaker start to 2024. Lower interest rates and a declining debt-to-disposable income ratio for households suggest higher spending and investment could be on the horizon. Markets in Saskatchewan have already been among the hottest for real estate activity in recent months. Retail sales have also seen a modest increase, which should support greater demand for retail and wholesale trade workers—the province’s largest employment category.
MANITOBA – Staying the course
We don’t see Manitoba’s growth rate changing much in 2024 (1.2%), despite taking a solid step back in 2023. Real GDP growth fell by nearly half last year (1.3%) after drought took a toll on the agricultural sector. Utilities production also fell sharply over the back half of the year, forcing the province to import power from other jurisdictions. Strong capital expenditure intentions (+8.2%), particularly in natural resources and manufacturing, will be the major driver keeping growth up above the national average in 2024.
Though drought conditions look less severe than last year, weather conditions are still a threat to some key industries. Current and expected conditions are more likely to support a return to normal production levels rather than a large boost in agricultural yields or hydroelectric power generation this year.
The province’s economy isn’t likely to see much of a boost from its household sector either. Employment growth hasn’t changed course much over the last year and a half, resulting in no change to the unemployment rate from last spring. Cautious consumers are still waiting on the sidelines despite low inflation—which is currently sitting at the lowest rate in Canada (0.4%). We think spending activity will gradually increase later year, though not enough to support faster growth in 2024. Still, the household sector looks to be modestly outperforming the Canadian average which should keep Manitoba’s real GDP running middle of the pack.
Large investments to the manufacturing sector, however, are poised to cushion the province against a more pronounced slowdown this year. Capital expenditure intentions for the industry are set to increase by $162 million in 2024—interrupting two consecutive years decline. We see this boding well for provincial growth in 2025 while offering plenty of upside to this year as well.
ONTARIO – High interest rates catch up with businesses and consumers
The first estimates for Ontario’s 2023 GDP by Statistics Canada were largely in line with our forecast, reaching 1.6%. Real GDP, however, has been virtually flat on a quarter-over-quarter basis since mid-year, and there are signs that sluggishness has carried over into this year.
Businesses and consumers are still grappling with high borrowing costs—keeping residential investment soft. The delayed impact of high interest rates has finally caught up to businesses and consumers, despite additional rate cuts coming this year. We see slower spending and investment cutting Ontario’s growth rate by more than half in 2024 to 0.5% in 2024.
High debt servicing costs and a serious lack of affordability are impacting the homebuilding sector. Housing starts are off to a soft start, down 6% year-over-year in Q1 after a 21% year-over-year decline in Q3. Low pre-construction sales are likely to weigh down starts further going forward. Despite expectations for additional rate cuts, we don’t see this segment of the economy making a speedy recovery—a weakness that’s likely to have a material drag on real GDP growth this year.
Softer economic conditions have weighed on the pace of hiring in the province. Ontario’s unemployment rate has risen more than any other province over the last year, increasing 1.3 percentage-points as of May. We see slower hiring and limited capacity to absorb the massive inflow of newcomers keeping upward pressure on the unemployment rate over the remainder of the year.
Nevertheless, Ontario’s automotive sector has remained a magnet for investment, securing another $15 billion for Honda’s new EV manufacturing facility in Alliston—bringing the auto investment tally past the $40 billion mark for the last three and a half years. Investment in this sector, however, is more likely to offer a boost to growth next year when larger projects (Volkswagen’s battery gigafactory, Umicore’s manufacturing plant, Stellantis-LG’s EV battery plant) reach peak construction.
QUEBEC – Capital investment and interest rate cuts will boost growth
Quebec’s economy is getting back on its feet after a lull in construction and manufacturing activity, and significant drop in electricity production tipped it into a mild recession last year.
A major public school teachers’ strike further dampened activity in late 2023. The end of that labour dispute in January and signs of recovery in the manufacturing and construction sectors more recently point to a turnaround early this year.
We expect interest rate cuts and record planned capital investment will get the economy’s wheels turning faster in 2024. We project growth will accelerate from an estimated 0.2% in 2023 to 0.8% in 2024.
Things look more promising so far this year. Housing starts have come off their lows, rising solidly by more than 17% year-over-year through April. Lumber production increased almost 10% in the first quarter. And aluminum production is also up 15% over the same period.
Meanwhile, Quebec consumers are flocking back to motor vehicle dealerships in growing numbers. New vehicle sales increased 20% y/y in Q1, slightly exceeding pre-pandemic levels.
We expect a series of interest rate cuts will bolster consumer confidence and stimulate spending on a broader array of items. It will also support a gradual pick-up in the housing market, which entered the early stages of a recovery in 2024.
The rebalancing of the labour market will continue in the near term—mainly thanks to strong growth in the work force. But the further rise we forecast in Quebec’s unemployment rate won’t spell trouble for workers.
In fact, the ramping up of major capital investment projects (including in the electric vehicle battery industry and green energy sector) is poised to create plenty of job opportunities in the province. We think record capital spending intentions this year—up a solid 8.8% from 2023—will give a welcome boost to growth later in 2024 and into 2025.
NEW BRUNSWICK – Weak business activity to overshadow consumer resilience
We expect New Brunswick will be among the few economies that will slow down in 2024 as slowing business investment overshadows the strong household sector. Low interest rate sensitivity won’t set the province up for much of a rebound either, given New Brunswickers are the least likely to adjust their spending patterns in response to interest rate movements.
A recent resurgence in population growth, however, has prompted a slight upward adjustment to our 2024 growth forecast—from 0.9% to 1.1%—bringing economic growth just ahead of the Canadian average. Still, this represents a slight moderation in growth from 2023.
New Brunswick’s household sector has been among the strongest in the country. Low debt burdens and a rapidly growing population have been the main factors supporting strong consumer spending in recent years—and continued to support strong household spending and investment over the first half of 2024. In fact, New Brunswick has recorded continued to record the strongest retail sales growth (5.8% y/y at Q1) in the country.
But cracks are beginning to emerge in other areas of the economy. Overall capital expenditures are set to drop in 2024 (-1.7% y/y) despite big provincial capital spending intentions. Manufacturing shipments have also been tepid amid slowing out-of-province demand. This has been particularly pronounced for wood product manufacturing, given the recent rut in Canadian and U.S. housing starts. A slow rebound in demand and flat housing starts over the remainder of the year should keep this trend persisting over the next few quarters.
Weak private investment and a rise in business closures also don’t bode well for the province. The rise in year-over-year business closures (3.4%) is nearly three times the national rate and the third highest in the country. We think this will keep downward pressure on new job openings, bringing the unemployment rate up by a larger margin (+1.0 percentage-points) than most other provinces.
NOVA SCOTIA – Big budget spending, strong household sector support modest recovery
Nova Scotia’s economy didn’t take as much of a backstep last year as we were anticipating, growing 1.3% in 2023. A large injection of public funds supported strong non-residential construction investment. At the same time, robust population growth and higher operational government spending kept employment churning—particularly in public administration. Another big budget should help these trends prevail into 2024, kicking growth into a slightly higher gear. This, alongside early signs of recovery in other segments of the economy, has prompted an upward adjustment to our 2024 growth forecast for Nova Scotia from 1.2% to 1.6%.
The province has rolled out big spending plans in its last two budgets to accommodate its growing headcount. Large allotments for infrastructure expansions have boded well for non-residential construction investment—which is currently growing faster than any other province (31% y/y in Q1), and coming almost entirely from institutional and government developments.
Capacity enhancements for government services have also supported strong employment growth in industries with a high concentration of publicly funded employees, including public administration, health and educational services. We see this boding well for overall employment growth this year (3.9%), given these industries have historically accounted for a significant share (about 30%) of Nova Scotia’s employee base.
Consumer spending has also made a modest comeback in the first quarter, likely in anticipation of further interest rate decreases and incoming personal income tax cuts. In fact, aggregate year-over-year spending was up more than any other province (aside from New Brunswick) and has already shown signs of recovery on a per capita basis.
Housing starts have also been very strong as of late, reaching a record-high in Nova Scotia over the last quarter of 2023 (10,300, seasonally adjusted)—almost all of which was concentrated in Halifax. That momentum carried into this year with starts more than doubling from a year ago.
PRINCE EDWARD ISLAND – Growing faster than most
With a forecasted rate of 2.1%, P.E.I. is expected to maintain its position at the top of our provincial growth ranking, in line with last year’s performance (2.2%) and well ahead of the national average.
The province’s population continues to grow faster than almost all other Canadian province. Alongside easing inflation pressures, this is sustaining strong household spending and employment on the island. Indeed, employment grew 7.1% year-over-year in the first quarter of 2024—the 4th consecutive quarter employment growth exceeded that of any other province.
Stabilizing farm input prices—especially fertilizer—are likely to benefit the province’s agricultural sector this season too. This comes as a welcome development after two weak years for the agriculture industry. A late start to this year’s lobster season, however, poses some downside risk to P.E.I.’s resource economy.
Tourism looks to be off to a good start as well. The province launched a new 5-year tourism strategy this spring that includes a number of efforts to further develop the industry on the island—including expansion of tourism capacity. Greater demand for domestic travel has also prompted the re-introduction of direct flights between P.E.I. and three Canadian cities, allowing for easier travel to the island.
NEWFOUNDLAND & LABRADOR – Economic recovery in the air
Newfoundland and Labrador’s economy took another big step back last year. As expected, gross domestic product contracted 2.5%, according to preliminary Statistics Canada estimates. A steep drop in oil production and lackluster demand for key minerals were the main drag on economic growth, while service industries continued to underperform.
Signs of recovery, however, are already apparent. The jobs market has shown notable improvement, and increased activity in the vital natural resource sectors is expected this year. We think this will propel Newfoundland and Labrador close to the front of our provincial growth rankings with real GDP expanding by 2% in 2024. This should offset most of last year’s decline but will still leave real GDP well below pre-pandemic levels.
The province’s oil and gas industry is expected to pick up this year despite a rough start in Q1. A gradual ramp-up in production from the Terra Nova field is expected and the return of the SeaRose vessel this summer should provide the industry with an overall boost. Production isn’t expected to return to 2020 levels, but we are expecting it to increase compared to 2023 with all offshore oilfields back in operation by Q3.
The mining industry should see a modest lift as well this year. Completion of the Voisey’s Bay expansion project and an expected rebound in demand are poised to boost mineral shipments, boding well for the industry. Nickel prices, however, are set to soften considerably amid global oversupply, which could weigh on exports.
Other segments of the economy are also seeing more activity. Labour markets have tightened considerably since last year and consumer spending has picked up. The 6,000 employment gain since Q1 2023 (seasonally adjusted) has brought employment up to an all-time high—with gains more pronounced among service industries. We see this as a general sign of revival for the province—beyond its natural resource mainstays.
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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.
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.
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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