Canada’s economy has slowed in textbook fashion: TD Economics

After the global economy defied expectations in 2023, TD Economics said in a report that it expects economic growth to reach its low point in the first half of next year.?

“The speed of the recovery thereafter depends on how motivated central banks are to normalize monetary policy. In the fight to outstrip expectations this year, the U.S. economy won by a wide margin. But, the tailwinds that drove above trend growth will die down next year. That, combined with 2% inflation within the Federal Reserve’s sights, should produce rate cuts in the second half of the year as the central bank tries to pull off the elusive soft landing,” said the report.

“With Canada’s economy already sputtering, the Bank of Canada will be out in front in cutting rates, likely in the spring. Recession risks are higher north of the border, with a bumpier landing in store.”

The report said Canada’s economy has slowed in textbook fashion in response to higher interest rates. So much so, that a discussion of whether the country was already in a recession heated up until the second quarter’s performance benefited from a revision that swung the data into the black following an initially reported contraction.?

“Canada may have skirted a recession, but the economy is running at a very anemic pace,” said TD Economics.

“The tone is set by the consumer. Canadians have been reining in spending on discretionary items since the Bank of Canada started raising interest rates last year. After essentially no growth in real consumer spending through the middle of the year, we expect a modest 0.6% pace in the fourth quarter. That will continue the weak trend, with spending likely to slow below 1% in real terms in the first half of the year as income growth slows and consumer penny-pinching reaches a peak. This belt tightening will extend to housing too where the BoC’s summer rate hikes have weakened the market further than we expected a quarter ago.

“Businesses are already following suit, with investment spending in retreat in the third quarter after a strong start to the year, and we expect it to remain sub-par through the coming quarters in line with the dour sentiment captured in the Bank of Canada’s Business Outlook Survey. Government spending is expected to contribute to growth as most levels of government seem to be a bit loath to tighten their belts. All in, Canada is on track to slow from 3.8% in 2022 to 1.1% this year, and trough next year at 0.5%. This leaves a very narrow margin for error and recession risks are elevated.”

Despite the weakness seen so far, Canada’s inflation metrics have shown fewer signs of cooling recently than other advanced economies. Relative to the U.S., core goods prices are a standout, added the report.?

“This may reflect a weaker Canadian dollar, which has kept imported goods inflation higher than south of the border, in addition to a less competitive retail environment. It may take a bit more time for price pressures to ease in Canada, and this is expected to keep the Bank of Canada vigilant despite obvious signs of a cooling economy. That said, we think the BoC will see enough progress in inflation by the spring to start cutting interest rates, which should help growth pick up in the latter part of next year and improve real GDP growth to 1.5% in 2025,” concluded TD Economics.????

Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list

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