It’s been a long time since economic data in Canada showed very much promise. The last 18 months have been defined by a cost of living crisis and a slowing economy.
But a handful of economic indicators give us some hope for 2024.
Inflation has slowed dramatically, and the economy didn’t actually slip into recession.
“We’ve just had one of the biggest declines in inflation that we’ve ever seen without a full-on recession. That’s great news,” said Douglas Porter, chief economist at BMO Capital Markets.
“Now, can we get the rest of the way down to two per cent? Without much pain? That’s still the big question for 2024.”
Last year was dominated by the double whammy of sharply rising interest rates and stubbornly high prices.
2024 should finally see some relief on both fronts. But it will pose new challenges as well.
The Bank of Canada has been trying to get inflation back to that one- to three-per-cent window since price growth kicked off in 2021. Forecasts show CPI should be firmly within that band in the first three months of the year.
Bank of Canada Governor Tiff Macklem spent most of his year-end news conference studiously avoiding anything that could be seen as a declaration of victory.
But he certainly came close with his financial lingo.
“The excess demand that drove prices higher over the past two years is now gone, as higher interest rates and tighter global financial conditions have helped the economy rebalance,” he said on Dec. 15.
But as one problem fades, another becomes more vivid.
The Canadian economy slowed throughout the year as higher interest rates bit into households and businesses.
For months, the economy has stagnated. It hasn’t grown at all in two quarters. Heading into 2024, the concern shifts from inflation to the potential for a recession.
“With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many,” said Macklem.
What will happen with the GDP?
Canada’s economy was bolstered by historic population growth last year. But when you adjust economic growth on a per capita basis, the anemic GDP numbers look even worse.
“Canadian GDP has already declined for five consecutive quarters on a per-capita basis with Q4 likely to stretch that run to 6,” wrote RBC economists Nathan Janzen and Claire Fan.
Meantime, the economy still hasn’t absorbed the full impact of all those rate hikes. The Bank of Canada says that usually takes about 18 months.
The central bank’s first hike came in March of 2022. That was 21 months ago. Economists such as Royce Mendes, managing director and head of macro strategy at Desjardins Capital, say more pain is coming.
“There’s a wall of mortgage renewals that this economy is about to hit. and to get going into 2025, it’s only going to get worse,” he told CBC News.
Mortgage rates to fall?
The Canada Mortgage and Housing Corporation says only about 300,000 homeowners have renewed their mortgages at these new higher rates.
Over the next two years, another 2.2 million Canadian households will be hit with significantly higher rates.
Mendes says that statistic alone should help spur the Bank of Canada on to start cutting interest rates in the first half of this year.
“While the Bank of Canada will probably be lowering rates in 2024, it might still be lowering rates even further and 2025 to help offset some of the pain that will be coming from those mortgage renewals,” said Mendes.
The C.D. Howe institute surveyed its council of monetary policy experts in December. They were asked when the central bank should start cutting rates and where they think the bank’s key overnight lending rate will be at the end of 2024.
The members differ in their approach. Some say the central bank should start cutting as early as the January meeting. Most recommend the bank get at least one cut under its belt by June.
By the end of the year, the council recommends the Bank of Canada get rates down to four per cent.
That should provide some relief to Canadian households and businesses that were clobbered in 2023. Price growth has moderated and will continue to ease down to the vaunted two per cent target, interest rates should come down.
But make no mistake, serious damage has been done. Even the once-resilient Canadian consumer has slowed and become more cautious as the economic pain dragged on the past two years.
“The cracks that are starting to show up in Canadian consumers’ spending behaviour and finances are expected to get gradually wider,” wrote CIBC economists Andrew Grantham and Katherine Judge in a note to clients.
But they say the cracks aren’t expected to turn into a chasm “in part due to the fact that households have already started to make some adjustments and aren’t spending excessively relative to pre-2020 norms.”
That’s not exactly a ringing endorsement; things won’t be great, but they probably won’t explode into something terrible. But after all these years of turmoil and trouble, consumers are used to finding cause of optimism in some gloomy outlooks. And if you squint past the first half of the year, you can just start to make out the picture of an economy getting back on track in the second half of 2024.