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Canadian Economic Outlook
The Canadian economy continues to inch closer to a recession in 2023. Early signs of easing inflation pressures are raising odds that the downturn will be ‘mild’ by historical standards. Unemployment dropped to record lows (since at least 1976) over the summer and has edged up only slightly since. But headwinds from aggressive central bank interest rate hikes are gaining strength. Housing markets have already retrenched sharply since spring. And consumer spending is expected to soften further as high inflation and rising debt payments cut into purchasing power.
Risks to this outlook are still tilted to the downside. The U.S. economy is also expected to tip into recession in 2023, weighing on Canadian exports. Meantime, geopolitical uncertainty, the threat of further global supply chain disruptions, and higher interest rates all remain key growth risks. Still, amid early signs that inflation pressures may have peaked, central banks could be close to the end of their rate-hiking cycle.
Inflation is easing up on both sides of the border
Price growth is still running well above central bank targets, but increases have been smaller and less-broad-based in recent months. The global supply chain crunch that drove much of the initial surge in inflation is easing. Commodity prices remain high, but have declined after surging earlier this year when Russia invaded Ukraine. Oil prices are running 40% below their early June highs, and wheat prices are down 50% from peak levels earlier this year.
Broader measures of inflation are still too-high, but have also eased up in both Canada and the U.S. Month-over-month increases in price growth excluding food and energy products fell to 3.7% (annualized) over the last three months in Canada, down from a peak of more than 8% on that basis in the summer. U.S. core (ex-food and energy) price growth has been higher. But that’s increasingly due to surging home rent prices that are the delayed result of past market hikes and a lag in new leases. The Bank of Canada’s Q4 Business Outlook Survey hinted that the re-pricing frenzy as pandemic lockdowns eased may have run its course as businesses pay closer attention to competitive pressures before passing along cost increases to customers.
Central banks are getting close to hitting pause on further rate hikes
With inflation still running well above target, early signs of slowing price growth won’t be enough for central banks to ease off on the monetary policy brake. But, they do suggest interest rates are close to levels that are ‘restrictive’ enough to slow economic activity and inflation in the year ahead. After a 50 basis point hike at the December meeting, we expect the BoC is now free to pause at the current overnight rate of 4.25% as the lagged impact of interest rate increases to-date slow economic activity. More resilient domestic spending momentum and less household sensitivity to higher interest rates in the United States means the U.S. Fed will likely hike further. But we expect the fed funds target range to peak at around 5% early next year.
‘Mild’ recession still expected
Pausing interest rate hikes won’t prevent a Canadian recession in the year ahead. A mild downturn is probably already a given in light of the current restrictive level of interest rates. Housing market activity looks to be nearing a bottom following a sharp correction over the spring and summer. But the residual impact from higher interest rates will continue to ripple through (as fixed rates mortgages are renewed for instance). This will soften consumer spending in the quarters ahead. In Canada, the share of household disposable income eaten up by debt payments will spike higher, to record levels, by the end of next year. Higher household debt payments and inflation are expected to subtract an additional $3,000 from purchasing power per-household in 2023.
Global supply chain pressures are easing, but so is the manufacturing sector outlook
Though ocean shipping costs and times are still above pre-pandemic levels, they’ve eased substantially. The cost of shipping a container from China to the U.S. west coast has fallen by more than 90% from peak levels last year. But lower demand for shipping is also a sign of slowing global manufacturing activity. Consumer spending on physical merchandise is expected to be among the first casualties of reduced household purchasing power, meaning lower orders for manufactured products. After running full-out for much of the last couple of years, closely-watched manufacturing PMI surveys in most major economies (including Canada’s) are pointing to a contraction in the sector in the year ahead.
Unemployment to rise as job openings pull back
A massive excess of job openings relative to available workers is keeping a cap on the unemployment rate near-term. In Canada, there were 60% more job openings than pre-pandemic levels as of November competing for 9% fewer unemployed workers. That will limit the amount that slowing labour demand feeds through to outright economy-wide job losses as some of those openings are pulled before they’re filled, and hours worked decline before layoffs. We expect employment levels to be little-changed in 2023 from 2022. Still, longer job searches and slower absorption of new labour force entrants into jobs will push the unemployment rate up to 6.8% by the end of next year.
Immigration and business investment will be key to the next economic recovery
Every recession in history has been followed by a recovery. We expect higher immigration and business investment will be key to fueling a return to growth later next year and into 2024. Labour shortages have been the heaviest weight on economic growth. And while those shortages might ease in the year ahead as the unemployment rate rises, they’ll re-emerge as the economy recovers. The ongoing retirement of the baby boom generation is creating structurally lower supply of workers. That means more upward pressure on wages, and potentially structurally higher interest rates than we were used to pre-pandemic.
Increased immigration targets to help address labour shortages will help boost labour supply and the longer-run productive capacity of the economy. But higher wages also add an incentive to businesses to boost the production capacity of the existing workforce through increased investment in productivity-enhancing equipment and technologies.
Provincial Outlook
Although the Canadian economy is expected to contract in 2023, the economic weakening is likely to vary across provinces. High commodity prices will continue to draw investment and support export growth—boding well for commodity-driven Prairie provinces. Likewise, a booming population out east will keep residential investment and consumer spending going despite the general economic downturn. But the rest of Canada won’t be so lucky. While Quebec’s momentum is already sluggish, high debt loads in B.C. and Ontario make residents and businesses particularly sensitive to interest rate hikes – leaving these provinces at a greater risk of recession in 2023.
Detailed forecast tables for the provinces are available here.
British Columbia – Strong momentum to fade
British Columbia’s economy will be impacted by the same forces at play in other provinces, namely higher interest rates and inflation, and the loss of household wealth. But we think household spending and residential investment in B.C. are headed for a deeper pullback in the coming year. We also see a smaller lift to the economy coming from major capital investment projects. These factors spell for tepid growth in 2023, which we peg at just 0.3%.
After strongly contributing to BC’s recovery through most of the pandemic, the housing market turned down in dramatic fashion since March 2022. We believe the correction has yet to fully run its course and will extend into 2023, weighing on residential investment in the province. Stronger housing construction, however, will provide some offset. We project housing starts to ramp up to 49,800 units in 2023 from 48,000 units in 2022, as builders, developers and policymakers address long-standing supply issues. Record immigration flowing into the province will further add to the urgency to build.
The outlook for non-residential investment also points to some moderation. Major capital projects in the province (including the Site C hydroelectric dam, LNG Kitimat, and Coastal Gaslink pipeline) are either winding down or past their ramp-up stage. As such, they won’t contribute to growth anymore.
We’re hard pressed to find new major capital projects that will take their place. The start of liquid natural gas product is still a couple of years away and won’t add to BC’s economy until then.
We expect household spending to slow down markedly in 2023. British Columbians carry the heaviest debt loads in Canada, making them especially sensitive to interest rate increases.
The tourism sector’s prospects are uncertain as the global economy teeters on the brink of recession. The intense pressures building on consumers at home and abroad bode poorly for tourism spending in BC. Huge pent-up demand for traveling accumulated during the pandemic, however, has the potential to sustain solid activity in the sector in the short term.
Alberta – No recession here
Alberta will be a standout again in 2023. We expect it to avoid a recession, thanks in part to a stronger energy sector and a broad-based recovery. It must be said that the provincial economy is still playing catch-up from two tough recessions since 2014. Our forecast calls for a solid 1.9% growth in 2023, outpacing all other provinces. Still, this would represent a marked deceleration from the 4.9% rate we project in 2022, as soaring interest rates and elevated inflation weigh on household and business spending.
Alberta’s housing sector is poised to remain a bright spot. Affordability still compares well relative to other parts of the country despite deteriorating over the past year. This is likely a big draw for migrants coming into the province. Immigration has taken off, with 2022 set to be a record year. Interprovincial migration is also trending positively for the first time since the oil price crash. Against this backdrop, we see housing starts rising further in 2023.
While there’s plenty to cheer about, Alberta households aren’t immune to the challenges posed by soaring interest rates and high inflation. Rising debt servicing costs will temper many Albertans’ urge to spend. We see this contributing to materially slower growth in retail sales in the province.
Saskatchewan – Natural resource-led growth on track
We expect the provincial economy to fare relatively well amid the broad slowdown in Canada. Strong global demand (and prices) for Saskatchewan’s products, and major investments to further develop the province’s natural resources will sustain moderate growth (+1.5%) in the economy in 2023. This will keep Saskatchewan near the top of our provincial growth rankings for a second year in a row.
With crop production sharply rebounding from drought-plagued conditions in 2021, Saskatchewan’s economy is on track to outperform other provinces in 2022. Agriculture isn’t the only sector contributing to the revitalization, though. Potash production and exports are also shooting through the roof as the war in Ukraine took a significant share of global capacity offline. Jumping nearly 100% in 2022, potash sales are projected to surpass the $1-billion mark. We expect global demand for Saskatchewan’s agricultural products and potash to remain solid in 2023, setting the stage for further growth in the provincial economy. Major potash producers announced their intentions to materially increase output in the province over the coming years.
The positive long-term outlook for potash in the province is attracting major investments. Leading them is the massive Jansen mining project ($12 billion), the development of which is being accelerated by its owner BHP. First production from the mine is scheduled for 2026. Construction of the new facility will provide a significant boost to construction and employment over the next few years.
Although employment growth in Saskatchewan lagged behind other provinces for the majority of 2022, the province’s employment level finally surpassed its pre-pandemic count as of October. Booming commodity markets and timid labour force growth will keep the provincial job market relatively tight in in the year ahead. In fact, unemployment in the province is projected to be the lowest in Canada in 2023 at 5.1%. Sustained commodity prices and the province’s favourable fiscal position are likely to cushion against the looming global economic downturn.
Manitoba – Slow but steady
Manitoba’s highly diversified economy will live up to its reputation for being slow but steady in 2023. We expect it to steer clear of a recession though with growth moderating to 0.8% from a robust 3.7% in 2022. Both domestic and external sectors will face headwinds.
We think the housing market has longer to adjust to higher interest rates and will likely continue to drift lower in the early part of 2023. Rapidly rising migration into the province will get homebuilders going, though. We forecast housing starts to edge higher to 7,800 units in 2023 from 7,600 units in 2022.
Manitoba has become an even more vital source of agricultural products for the world since the war in Ukraine began. Better weather conditions in 2022 supported a significant increase in crop production. As the war continues to disrupt Ukrainian shipments to global markets, demand for Manitoba grains and other foodstuff remains as strong as ever. We believe this will create further opportunities for provincial producers in 2023.
Ontario – Bumpier road ahead
Ontario’s economic path is about to get a lot bumpier. Soaring interest rates and a higher cost of living will radically change the landscape, causing many Ontarians and businesses to tighten their belts. We expect this to lead to a slight contraction in the provincial economy in 2023. Like our scenario for Canada, we see the event as mild and short-lived with growth resuming in 2024.
Higher interest rates and an elevated cost of living will be a nasty combination for many Ontarians who carry heavy debt loads. We expect growing financial pressure to significantly dampen household spending in the province, marking a clear departure from the spree consumers have been on during most of the pandemic. Any cutbacks are more likely to touch discretionary items.
Global supply chain disruptions generated a lot of turbulence for Ontario manufacturers over the past few years. But lack of demand for their products was rarely an issue. Now with recessions about to impact markets at home and abroad, demand for many Ontario products is likely to soften. We expect this to slow manufacturing activity in the year ahead.
Quebec – Moderating trends to deepen and broaden
Quebec’s economy is already showing signs of slowing down. Goods-producing industries are now walking back some of the solid increases recorded earlier in the pandemic when demand (both at home and abroad) ballooned. We expect the weakening trend to deepen and broaden to the services sector in 2023, halting overall growth in the process.
Construction activity has sputtered as of late alongside the sharp cooling in the housing market. The softening in homebuilding isn’t really surprising given it’s coming off a 34-year high in 2021. That pace—of nearly 68,000 new housing starts—was clearly unsustainable. But non-residential construction is also moderating as major infrastructure projects wind down. We project the sector’s decline to extend into 2023. Our view is the provincial housing market has yet to fully adjust to higher interest rates and this will continue to restrain residential investment for a while longer.
The lifting of pandemic restrictions gave a welcome boost to many service industries in 2022—including hospitality, entertainment and recreation. While their recovery may not be entirely complete, some of them are about to face another round of challenges. We expect soaring interest rates, declining wealth and higher costs of living to prompt Quebec consumers to tighten their belts, dampening discretionary spending. We see this holding back activity in the services sector.
Recessionary conditions globally—but especially in the United States, Quebec’s largest foreign export market—are poised to put a damper on demand for the province’s exports. Added to a more challenging outlook for consumers and businesses at home, we think this will keep many Quebec manufacturers on the defensive in the year ahead.
There may be a silver lining for provincial employers, though. The economic downturn will cool demand for workers, likely bringing some degree of relief from labour shortages to all sorts of businesses. We forecast Quebec’s unemployment rate to rise from a record-low 4.3% in 2022 to 5.4% in 2023. We also expect historically high immigration levels to help address those issues.
New Brunswick– Consumers down, but not out
We expect growth in the New Brunswick economy to follow the general trend by further moderating in 2023 to 1.1%, while still outpacing the national average (+0.4%). Supported by a rapidly expanding population, we see household spending rising further—albeit at a slower pace—buffering New Brunswick’s economy from a broad-based contraction in the year ahead.
Given the relatively affordable cost of living, New Brunswick has become quite the destination for Canadians and newcomers alike. Next to Ontario, the province welcomed the highest percentage of net non-permanent residents in Canada, upping its share of the pie from 0.8% in 2019 to 7.6% in 2021. And with affordability concerns growing elsewhere in Canada, that trend isn’t likely to reverse anytime soon.
As the province continues to beat its previous population growth records, the large influx of people has left its mark on consumption and investment levels. Although contracting from the post-pandemic spending frenzy, retail sales growth in 2023 (+1.3%) is expected to be among the highest in Canada largely thanks to high in-migration.
But the relative resilience of household spending won’t fully insulate New Brunswick’s economy from the global downturn. In fact, high interest rates and soaring inflation have already started to hamper provincial exports and manufacturing activity. After peaking in May, manufacturing sales have dropped 15% as of September and exports are down 41% over the same time frame. Additionally, non-residential investment still hasn’t fully recovered from the 2020 shock, though “turnaround” work at the province’s major oil refinery should provide a near-term bump in spending.
Facing the tightest labour market on record, the province is seeing significant upward pressure on wages—rising at the fastest rate in Canada. The rush to rebuild infrastructures and properties in the wake of Hurricane Fiona isn’t doing anything to cool material and labour costs either. That said, the general slowdown in economic activity is expected to let steam out of the labour market, setting the stage for a rise in the unemployment rate to 8.1% in 2023 from 7.3% in 2022, and help inflation moderate meaningfully.
Nova Scotia – Booming population providing a nice cushion
Nova Scotia won’t be immune to the broader economic weakening but its rapidly expanding population should cushion against a recession. High inflation and the sharp increase in interest rates are projected to cool consumer spending significantly in the year ahead, contributing to slow economic growth from a forecasted 2.0% in 2022 to 1.2% in 2023. Still, this would leave the province above the national average of 0.4%.
The large influx of people is having a positive effect on several economic sectors—housing in particular. While the provincial housing market is in the midst of a cyclical correction that is likely to carry into 2023, we see residential construction activity continuing to pick up in the year ahead. We forecast housing starts to rise from 6,600 units in 2022 to 7,300 units in 2023. With peak inflation likely behind us (7.4% in 2022), builders are expected to take advantage of moderating material costs to get more homes constructed.
Rapid population growth should attenuate the pressures on household spending and investment arising from higher inflation and the rise in interest rates. This will be facilitated by the fact that Nova Scotians are less indebted than many other Canadians and therefore less sensitive to changes in interest rates.
Prince Edward Island – Newcomers help solidify economy’s foundation
We expect PEI’s economy to continue to expand in 2023. While our forecasted growth rate of 1.3% in 2023 would be a tad slower than the 2.3% we project for 2022, it would far outpace the national average (+0.4%). Low levels of household debt and a booming population set a positive backdrop for household spending and residential investment in the province.
PEI’s job market is red hot. Employment was up a stunning 6.3% in the first 11 months of 2022—nearly 3 percentage points higher than the national average. However, with one-time infrastructure rebuilding projects coming to a close and the economy gearing down, we expect employment growth to slow considerably in 2023 (to +0.4%).
Newfoundland and Labrador – Bucking the slowing trend
Running behind other provinces, Newfoundland & Labrador’s recovery from the pandemic downturn is set to take a bigger step forward in 2023. We expect oil and mining production to increase, and a solidly growing population to stimulate demand for goods and services within the province. This will contribute to Newfoundland and Labrador’s growth acceleration to 1.8% in 2023, and run counter to the general weakening trend.
The lifting of pandemic restrictions has been positive news for the province’s tourism sector. The number of visitors jumped nearly 300% in the first five months of 2022 relative to the same period a year earlier. Still, the sector’s recovery is far from complete as that number was still roughly 40% lower than 2019 levels. We expect 2023 to show further progress.
One of the more encouraging developments over the past year has been the solid increase in Newfoundland and Labrador’s population, following five consecutive years of outright declines. Record immigration and the resumption of positive net interprovincial migration flows have boosted population growth to a 12-year high. We expect this trend to continue in 2023 in part thanks to Canada’s increased immigration targets. Improved demographics will sustain stronger demand for goods and services, and housing.
Detailed forecast tables:
Canada, US And Financial Markets
Provincial Economies
Robert Hogue is responsible for providing analysis and forecasts on the Canadian housing market and provincial economies.
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.
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.
Carrie Freestone is an economist at RBC. She provides labour market analysis, and is a member of the regional analysis group, contributing to the provincial macro outlook.
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.
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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