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The Canadian economy is still slowing as the lagged impact of earlier interest rate increases materialize. Gross domestic product edged higher in Q4 2023 but once again not fast enough to keep up with surging population growth. Per-person output (a key indicator of household living standards) fell for a sixth straight quarter (by our count) and is back at 2016 levels.
Output has also stagnated in the Euro area and outright declined over the second half of 2023 in the United Kingdom. The U.S. economy is still an outlier and has continued to surge higher, helping to prop up Canadian exports. But Canadian domestic demand declined in Q4 for the first time in a year with a small increase in consumer spending more than offset by lower residential investment and a second consecutive large pullback in business investment.
Household adjustment to higher rates is not complete
While the economy has softened significantly, the slowing hasn’t been as pronounced as feared when the Bank of Canada and other global central banks started aggressively hiking interest rates in 2022.
Hiring demand has slowed with the number of job openings 25% below year-ago levels. But a large chunk of the increase in the unemployment rate over the last year (0.7 percentage points) has come from longer job search times, primarily for students and new graduates rather than layoffs.
Still, the ratio of household debt payments to disposable incomes is at record levels and will continue to rise as mortgages get renewed at higher interest rates. Household delinquency rates have been edging higher and business bankruptcies have been rising sharply for the first time in decades. Deteriorating housing affordability is cutting into household purchasing power. Home prices are still high and rent prices are rising sharply even though broader inflation pressures have eased.
Slower inflation reinforces that higher rates won’t be needed
The good news is that inflation is slowing, and that should allow the Bank of Canada to start easing monetary policy by mid-year. To be sure, high prices are still squeezing households. Canada’s consumer price index is up 17% from 2019 levels and food prices are up 25%. Slower inflation going forward just means that future increases will be smaller, not that prices will decline. But the breadth of price growth has narrowed and a disproportionate share of the remaining upward pressure is coming from mortgage interest costs that are a direct result of earlier interest rate increases. The central bank’s preferred “core” measures of underlying price pressures are still above 3%, but have been edging lower.
BoC to shift to interest rate cuts by mid-year
The economic data hasn’t been soft enough to push the BoC to react urgently with interest rate cuts, but it has been soft enough that the most likely trajectory for future price growth is still lower. We look for the BoC to begin gradually cutting rates in June as inflation pressures continue to slow. The resilience of the U.S. economy despite higher interest rates means there is less urgency for the U.S. Federal Reserve to react. Still, U.S. inflation has been slowing despite a strong economy, and the strength of the U.S. consumer is unsustainable. We continue to expect the Fed will also be in a position for its first interest rate cut in June, but the pace of cuts will be slower than previously expected.
Slowing business investment adds to productivity concerns
Real (after inflation) Canadian business investment fell by almost 7% over the second half of 2023— adding to decades of underinvestment dating back to the 2008/09 financial crisis and 2015 oil price collapse. Slow business investment can have a lasting downward impact on growth by lowering future productivity growth, which has historically been the key driver of improvements in after-inflation wages and living standards over time. Early surveys are pointing to stronger investment growth in 2024. Statistics Canada’s annual investment intentions survey showed a 4.5% increase in planned non-residential spending in 2024. Stronger investment spending and better utilization of the skills of new immigrants will be needed to improve per-capita living standards over the long run.
Canada’s ascent is expected to be slow
The economic backdrop in Canada should look a little better in the second half of 2024 contingent on the BoC’s move to lower interest rates. Consumers will drive the bulk of the pick-up in the back half of the year. Services sector spending will provide most of the lift as consumers start to reprioritize discretionary spending as inflationary pressures around essentials abate. Population growth also continues to add to consumer demand. Still, the rise will be slow as households remain cash-strapped. The household savings buffer is not evenly distributed among income brackets. Wage growth has shown signs of slowing as labour demand (job openings) cool and the unemployment rate rises.
Provincial Outlook
We expect interest rate pressures and a softening U.S. economy to weigh on economic growth in B.C. (+0.3%), Quebec (+0.4%) and Ontario (+0.5%) the most this year. A resurgence in fertilizer markets and completion of TMX is likely to keep the economic slowdown in the Prairies relatively mild, keeping growth ahead of the national average in Alberta (+1.7%), Saskatchewan (+1.6%) and Manitoba (+1.2%).
Out east, a resurgence in natural resource production is expected to pull economic growth in Newfoundland and Labrador (+2.0%) back into positive territory while strong population growth and a potential lift to construction investment is poised to boost growth in P.E.I. (+2.1%) and Nova Scotia (+1.2%) in 2024. A weaker trade outlook and shrinking capital expenditures, however, will weigh on real GDP growth in in New Brunswick (+0.9%).
BRITISH COLUMBIA – Household weakness to persist
High interest rates are having particularly adverse effects in British Columbia. Heavily indebted residents have clamped down on big purchases, keeping residential investment on a continued downtrend except for a modest increase in October. Per capita spending is also down from year-ago levels. Softness on the household end won’t bode well for businesses either as a weak economic outlook for the province reins in capital spending plans for 2024. Overall, we see economic growth in B.C. trailing all other provinces this year with a y/y real GDP growth rate of 0.3%.
The economy has been battling significant headwinds in recent months. Despite the modest housing market revival observed this winter, high ratios of household debt to disposable income have kept residential investment lingering around a 10-year low. Given the severe loss of affordability in recent years, we don’t see things boomeranging back to 2022 levels quickly. In fact, home prices will remain relatively stable, dipping just 0.3% in 2024 from last year.
Weakness on the household side is funnelling through to weaker business activity. Indeed, B.C. experienced one of the sharpest increases in business closures last year, reporting a 3.7% increase relative to 2022. And it doesn’t appear to be looking up soon either. The province is set to see the steepest pullback in capital expenditures—falling 5.3% in 2024. The drop is set to come largely from transportation and warehousing, and healthcare and social assistance, according to Statistics Canada’s latest non-residential capital expenditure intentions.
The tough business environment, and a wrap up on major projects (like TMX and Kitimat LNG terminal), is likely to contribute to slower employment in the year ahead. In fact, we see employment growth moderating to 1.3% in 2024—keeping employment growth behind the national average for another year.
ALBERTA – Staying ahead of the pack
Alberta’s strong demographics continue to support relatively robust employment growth and residential investment, putting the province in a better position than most in 2024. But as the global economy weakens and demand for Alberta’s key commodities dampen, even this provincial economy has shown signs of gearing down. At 1.7%, we see real GDP growth in Alberta decelerating modestly from the 2.2% we estimate in 2023. Still, this should keep Alberta growing ahead of the Canadian average for a third consecutive year.
But a resurgence in spending and investment on the household side alone won’t be enough to counter weakness in other segments of the economy. Heightened geopolitical tensions and slower global growth are adding turbulence to the energy market outlook. At the same time, the government of Canada’s new carbon neutral initiatives have provoked investment groans—all of which are contributing to a slow start to the year for new well drillings.
But with TMX expected to come online in the second quarter of this year, the capacity enhancement could bring Alberta oil to new markets—welcoming the prospect for greater production in the months ahead.
General capital expenditure intentions for Alberta are also down in 2024 (-0.9% y/y). Like elsewhere in Canada, transportation and warehousing is anticipated to account for most of the dip after investment dollars peaked in 2022. But agriculture is also set to see a modest decrease (-4%) this year. Part of this could be coming from mixed farmer sentiment, given the lower than usual levels of precipitation this winter. We suspect lingering impacts of the Alberta Drought Assistance Program will also contribute to lower investment in agriculture this year, following the outsized increase in 2023.
SASKATCHEWAN – Rebounding earlier than most
A larger than anticipated capital expenditure boost last year and an astounding take off in the labour market has prompted an upward revision of our 2023 growth forecast to 1.1%. Still, we see Saskatchewan’s economy climbing the provincial growth rankings in the year ahead with a projected 1.6% real GDP growth rate in 2024. As fertilizer markets see more stable supply and improved affordability, we’re expecting to see a gradual rebound in demand for one of Saskatchewan’s key commodities: potash. Lower input costs and a (potentially) better growing season should give the province’s agriculture sector a nice push too.
We see a less tumultuous outlook forming for the province’s agriculture industry as well. Though crop production has largely kept pace with demand, a loss of production from Ukraine has kept global grain markets relatively tight—keeping crop prices hovering above pre-pandemic levels. Agriculture and Agri-Foods Canada still expects production for most crops to increase marginally in 2024, though potential for another hot and dry season from the El Niño weather pattern poses a potential threat to Saskatchewan’s yields.
A constructive outlook for Saskatchewan commodities is set to draw in another outsized investment boost in 2024 too, though not as robust as last year. We expect this to keep labour market prospects generally favourable, picking up consumer confidence after a particularly soft year. In fact, retail sales already increased in Q4, bringing per capita spending back to year-ago levels. A housing market rebound is already taking shape in the province too. This, alongside normalising fertilizer markets, should set the stage for a boost to real GDP in the year ahead.
MANITOBA – Losing momentum
We’ve seen more signs of Manitoba gearing down in recent months. As positive spillover effects from a resilient Ontario and USA wane, we see weaker demand weighing on Manitoba’s exports in the year ahead. Slower business activity is likely to take a toll on labour markets too, keeping household spending and consumption under wrap. We continue to expect a moderation in Manitoba’s economic growth from 1.7% in 2023 to 1.2% in 2024. Still, this should keep the province’s real GDP growth ahead of the Canadian average for the two consecutive years.
Slowing demand for Manitoba goods is poised to ruffle labour markets in the year ahead as well. Though Manitoba’s jobs market has yet to show signs of wavering, we see an inflection point for job growth on the horizon, supporting a modest increase to the unemployment rate (5.2% in 2024).
This should keep retail sales relatively muted (+1.1%) and a short leash on the housing market revival in 2024. In fact, both aggregate and per capita real retail sales growth (y/y) took a more meaningful step back at the end of 2023, a signal that softness is already starting to set in.
ONTARIO – 2024 GDP growth will fall to half from year ago
Ontario’s economy is set to take a more pronounced step back, growing just 0.5% in 2024 from 1.2% in 2023. Even though this marks a slight upward revision from the 0.2% growth previously forecasted, we still see the economy slowing down significantly. Subdued activity in the United States and the lagged impact of high interest rates on spending and investment at home will be the dominant forces repressing growth this year.
An earlier-than-anticipated revival in Ontario’s real estate market may prop up growth a few percentage points from our previous projection for 2024 (from 0.2% to 0.5%) and 2023 (from 1.1% to 1.2%), but housing market activity is still historically soft. We continue to expect a gradual recovery in real estate activity as the Bank of Canada moves to cut rates. This should support mild growth in residential investment, which already passed a cyclical bottom in July 2023.
Some major construction projects in the electric vehicle space may act as a backstop for the economy (including Volkswagen’s $7 billion battery manufacturing plant in St. Thomas, Ont. and LG and Stellantis’ $5 billion battery facility in Windsor, Ont.) but won’t be enough to counteract the broader cooldown from high interest rates and slower global growth. Persistent headwinds should be enough to cut growth by more than half from 2023.
Quebec – Still in a soft patch as pandemic recovery stalls
It’s still unclear whether Quebec’s economy continued to contract in the final quarter of 2023. There were signs of recovery in the construction and utilities sectors, but large public sector labour strikes in November and December significantly disrupted educational services activity and strained other sectors as parents scrambled to look after out-of-school children. The late-year turbulence at a minimum has prolonged the soft patch the economy has been in since last spring. It may take a while to come out of that with the outlook for consumers still shaky—though the end of strikes should boost the start of the year. We see the prospect of interest rate cuts over the second half of 2024 as a more consequential turning point for the economy. The ramping up of business non-residential investment should also add more fuel to the recovery later this year. We project annual growth in Quebec’s economy to be little changed at 0.4% in 2024, up marginally from 0.3% in 2023.
For now, much of the economy is struggling. Earlier recoveries have stalled in industries hard hit by the pandemic. Growth in accommodation and food services, arts and entertainment and parts of retail trade are stagnant at best, if not retreating. Manufacturing production has plateaued. The sharp increase in the cost of living, high interest rates and mounting concerns about the job market are weighing heavily on consumer confidence. Employment has been essentially flat since September—and the employment rate is falling due to the rapid growth in the labour force. We think turning this picture around will be a gradual process over the coming year.
NEW BRUNSWICK – Strong household sector to mitigate economic slowdown
Household spending and investment has held up considerably well in New Brunswick. And given the relatively low ratios of household debt to disposable income, we expect to see a continuation of this into 2024. Weakness on the business side, however, is projected to cast a shadow over real GDP growth in the year ahead. As such, we continue to expect a slight moderation in economic growth from 1.1% in 2023 to 0.9% in 2024.
Though this means anticipated rate cuts aren’t expected to provoke a large uptick in spending, lower rates alongside dwindling price pressures will likely keep consumer strength playing out in 2024. Strong population growth should help sustain spending patterns too, preventing a steep slowdown in overall growth in the year ahead.
A turn to lower interest rates this year, however, isn’t expected to offer much relief to lacklustre business investment. Indeed, New Brunswick is one of three provinces projected to see a decline in capital expenditures in 2024 (-1.7%). Dips are projected to come largely from utilities after large capital investments were made to address the province’s infrastructure deficit. Lower investment in manufacturing is expected too on account of souring consumer sentiment in the U.S. and other Canadian jurisdictions. A tight lid on new investment should keep non-residential construction from making a meaningful comeback this year, contributing to supressed economic growth in the year ahead.
NOVA SCOTIA – Turning a corner
Many of the headwinds that pulled back Nova Scotia’s growth in 2023 are likely to persist over the first half of this year. But as the Bank of Canada moves to cut interest rates, we expect household spending and investment to pick back up in the second half of 2024. In fact, we’ve already seen the start of this, prompting a slight upward revision of our 2023 growth forecast from 0.6% to 0.8% in 2023. A strong household sector and an anticipated uptick in capital expenditures are likely to be the dominant force pulling up growth to 1.2% in 2024.
The strong population growth is also poised to support a bounce back in real estate activity this year. At 16%, the forecasted rebound in home resales is projected to be among the strongest in Canada. Though we don’t anticipate large price increases, a gradual appreciation in home prices should be enough to keep residential investment growth positive in 2024.
Greater investment in public administration and infrastructure is also slated for 2024. Another $900 million in non-residential capital expenditures is expected to bring business investment up 16% from 2023—the largest investment boost of all the provinces.
We see private investment increasing this year too as construction of EverWind Fuels begins construction of Nova Scotia’s first green hydrogen and ammonia project this fall.
PRINCE EDWARD ISLAND – Picking up steam
P.E.I. is one of the few provincial economies we see picking up steam in the year ahead. Robust population growth and easing inflationary pressures are laying the foundation for another solid year for household spending. And we’re optimistic that a continued inflow of migrants to the province will help ease labour shortages—particularly in the province’s strained construction industry. At a forecasted rate of 2.1%, we see P.E.I. ascending back to the top of our provincial growth ranking in 2024.
Though the province has suffered an acute loss of affordability over the last two years, the housing market on P.E.I. remains relatively affordable compared to other jurisdictions in Canada. As such, we think islanders will have to wait for the same deep rate cuts before making a comeback. In fact, a forecasted 16% jump in home resales is slated to bring housing market activity back to pandemic levels on the island in 2024.
The beginning of a rebound in the construction industry could also be forming this year. Though labour shortages remain an issue on the island, P.E.I. did record another above-average gain to construction employment (+5.5%) last year following an outsized (+23%) increase in 2022. Construction investment also appeared to pick up the pace in the latter half of 2023, creating good momentum going into 2024. We see this sector improving further as interest rates come down, relieving some cost pressures from development projects later this year.
NEWFOUNDLAND & LABRADOR – Busier year on the horizon
We see growth prospects looking up in 2024 for this provincial economy. Not only is a rebound in oil production anticipated this year, but construction of Canda’s first wind-hydrogen project could be coming to the forefront too. Accompanying the brighter industry outlook, we see a stronger year for employment growth forming in the year ahead. Together, these forces should support a real GDP expansion of 2.0% in 2024. Recent volatility seen in the oil and gas industry, however, remains a downside risk to the forecast.
Things also appear to be picking up in Newfoundland and Labrador’s emerging wind-hydrogen sector. World Energy GH2 has already secured $128 million in development loans from the federal government for the province’s first wind-hydrogen project at Port au Port-Stephenville. The company expressed plans to begin construction as early as this year, though no updates have been provided.
The brighter outlook for this provincial economy has boded well for its labour market too. After six months of little change, employment took off in January of this year and sustained a good clip in February. We see this as a sign of things to come as a busier year for oil production keeps upward pressure on labour demand.
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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.
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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