The global economic growth backdrop has continued to slow as the lagged impact of aggressive central bank interest rate hikes build continue to build alongside a continued squeeze on household purchasing power from the earlier rise in food and energy prices. Commodity prices are still high but have have edged progressively lower.
The U.S. economy remains an outlier with strong GDP growth through Q3 2023. But households are running out of savings and ‘excess’ labour demand has evaporated with further declines in job openings expected to begin to push unemployment more significantly higher. We continue to expect the U.S. economy to soften in early 2024. GDP edged lower in Europe and was essentially unchanged in the UK over the summer.
Canada’s economy continues to soften as debt payments rise
Canada’s economy passed a tipping point some time ago. A surge in population propped up measures of total economic activity earlier in 2023 – each new arrival boosts both the productive capacity of the economy and consumer demand. But GDP fell 1.1% (annualized) in Q3 despite those tailwinds, and per-person output has now declined for five straight quarters. After-inflation, consumer expenditures per-capita fell to 1% below pre-pandemic levels in Q3.
Rising debt payments and higher fuel and grocery bills have left household purchasing power diminished. And labour markets are softening with employment no longer rising fast enough to absorb a rapidly growing available workforce. The unemployment rate has risen by 0.8 percentage points since April – a magnitude of increase that historically usually only comes in the early stages of an economic downturn. Job openings continue to retrench, down 30% year-over-year as of September.
Household savings are still very high, and that can act as a backstop in times of economic stress. But the cash stockpile is not evenly distributed across income cohorts and is increasingly unlikely to be spent in the near-term. Households typically save more (and spend less) when the outlook is uncertain and consumer confidence fell below the lows of the 2008/09 recession in November. And household savings may be higher in part to accumulate funds among households that will still see significant increases in mortgage payments, including a mortgage refinancing wave coming in 2025. The household saving rate rose to 5.1% in Q3 (still well-above the 2.1% pre-pandemic rate in 2019.)
Slowdown in domestic demand expected to ease as the BoC cuts rates
Consumer spending is expected to remain under pressure in the near-term as rising debt payments and higher food and energy prices continue to soak up purchasing power. Businesses have also been pulling back. Business investment on machinery and equipment fell 14.4% in Q3. For the first time since the pandemic, businesses tracked by the Canadian Federation of Independent Business ranked concerns about demand for their products as a larger factor limiting production/sales than labour shortages. Housing markets have looked wobbly with headwinds from higher interest rates being countered by high rates of population growth and limited supply of homes available.
Canadian labour shortages easing as demand slows
Shortage of skilled labourInsufficient domestic demandJan ’19Jul ’19Jan ’20Jul ’20Jan ’21Jul ’21Jan ’22Jul ’22Jan ’23Jul ‘2310%20%30%40%50%60%
Central banks have done their job: additional hikes likely off the table
While the near-term economic outlook is not exactly rosy, the good news is that higher interest rates and slower growth are working to ease inflation pressures. The full impact of rate hikes to-date has yet to be felt, and downside remain if the slowdown in labour markets accelerates. Economic data to-date is still tracking consistent with a ‘mild’ downturn by historical standards.
And easing in the breadth of inflation pressures in both the U.S. and Canada combined with softer economic data has increased the odds that the U.S. Fed and the BoC will be pivoting to interest rate cuts in the year ahead. That won’t happen right away – central banks will be cautious about declaring victory over inflation too early. But we expect both the U.S. Fed and the BoC will be shifting to interest rate cuts in the first half of 2024.
Canadian per capita consumption is in-line with prior recessions
Quarters since recession peak (Q=0 at recession peak)19811990200820232023F-1-2-3-40123456789101112949698100102104
Economic outlook to brighten starting in the second half of next year
Once central banks are able to begin easing off the monetary policy brakes, we expect the economy to perk up over the second half of next year. The impact of higher interest rates will continue to ripple through the economy with long lags – see more on the expected impact of mortgage renewals on the household debt payments in 2025 below. But those challenges are likely manageable as long as labour markets are beginning to improve by then. We expect GDP growth will begin to pick up in the second half of 2024 and into 2025.
Central Banks to ease off the brakes in 2024
ForecastBoC overnight rateFed fund target (top of range)Jul ’21Jan ’22Jul ’22Jan ’23Jul ’23Jan ’24Jul ‘240%1%2%3%4%5%6%
2025 mortgage renewal wave is large but manageable
Roughly 40% of the outstanding stock of mortgages will have already renewed at higher interest rates by the end of 2023.
Provincial Outlook
We expect minimal economic growth in Ontario (+0.2%), B.C. (+0.3%) and Quebec (+0.4%) in 2024 as households remain under heavy pressure from high interest rates and a soft US economy weighs on external trade. Though the Prairie provinces won’t be immune to the slowdown, an optimistic investment outlook should keep Alberta (+1.7%), Saskatchewan (+1.6%), and Manitoba (+1.2%) growing at a modest pace. Meantime, a resurgence in natural resource production and partial recovery in construction investment may be enough to lift growth in P.E.I. (+2.1%), Newfoundland and Labrador (+2.0%), and Nova Scotia (+1.2%) in 2024. A weaker trade outlook in New Brunswick (+0.9%), however, is likely to keep growth relatively muted in the year ahead.
2023, %
ALTAPEIMANNBONTCANSASKNSBCQUENFL-2%-1%0%1%2%
2024, %
PEINFLALTASASKNSMANNBCANQUEBCONT-2%-1%0%1%2%
2025, %
ALTAPEISASKNFLNSONTCANQUEBCMANNB-2%-1%0%1%2%
BRITISH COLUMBIA – Spending and investment lull to continue
We expect many of the challenges that stunted economic growth in B.C. in 2023 to remain pressure points for the province in the year ahead. Though there’s no telling of what 2024 will bring insofar as natural disasters, high interest rates and strained affordability are poised to keep the spending and investment lull going for a little longer. And with a drop in net new projects, we don’t expect to see a big improvement to the province’s softening labour market either. This should keep B.C.’s overall economic growth at the back of the pack in 2024 (+0.3%).
Slowing economic activity stunts employment growth in B.C.
BCSASKNFLMANQUECANONTNSNBALTAPEI0%1%2%3%4%5%6%
ALBERTA – Tailwinds moderating in 2024
Though tailwinds from commodity markets and strong population inflows are waning, Alberta is slated to keep its place near the top of our provincial growth ranking in 2024 (+1.7%). It’s relative affordability advantage and impressive growth streak continue to entice a record number of new migrants, keeping upward pressure on aggregate spending, investment, and employment growth. Despite the upside strong demographic trends bring to overall growth, a flourishing population, alone, won’t be enough to shield Alberta’s economy from moderating further in 2024.
Value of Alberta oil and gas exports recovering
Jan ’19Jul ’19Jan ’20Jul ’20Jan ’21Jul ’21Jan ’22Jul ’22Jan ’23Jul ’23$0B$2B$4B$6B$8B$10B$12B$14B$16B
SASKATCHEWAN – Stage set for 2024 rebound
After a tough year for crop production and fertilizer exports, better growth prospects are on the horizon for this provincial economy. Indeed, Saskatchewan is set to buck the weakening trend in 2024 as the outlook for potash improves and (hopefully) better weather supports a more favourable growing season. We see these tailwinds bringing economic growth up to 1.6% in 2024 – well ahead of the Canadian average.
Saskatchewan potash production trends down toward pre-pandemic levels
Jan ’19Jul ’19Jan ’20Jul ’20Jan ’21Jul ’21Jan ’22Jul ’22Jan ’23Jul ‘2305001000150020002500
MANITOBA – Slowing its stride
This past summer’s drought in Manitoba turned out to be less detrimental to the province’s agricultural sector than we had anticipated. Significantly upgraded crop production estimates from Statistics Canada prompted us to upwardly revise our 2023 real GDP projection to 1.7% – a 0.3 percentage-point increase from our September outlook. Still, this represents a notable moderation from the 3.3% recorded in 2022. We expect the slowing trend to extend into 2024. As businesses and consumers keep a tight grip on their purse strings amid high costs, real GDP growth is poised to moderate further to 1.2%.
Manufacturing shipments hit inflection point
20142016201820202022$3B$4B$5B$6B$7B
ONTARIO – Gearing down
Though Ontario’s growth is expected to come in close to the Canadian average this year, a steep moderation is likely to bring it to the back of the pack in 2024. Not only will high interest rates continue to hamper housing market activity and spending next year, but slower growth in the U.S. is also poised to dampen the manufacturing outlook. Record investment in EV battery plants will partially offset the weakening trend, however, manufacturing developments in southwestern Ontario won’t be enough to fully counteract the broader softening. As such, we have real GDP growth in Ontario pegged at just 0.2% in 2024, down from 1.1% in 2023.
Ontario manufacturing shipments flatten
Q1-21Q2-21Q3-21Q4-21Q1-22Q2-22Q3-22Q4-22Q1-23Q2-23Q3-230%10%20%30%40%
Quebec – Bruises to take longer to heal
The Quebec economy is heading into 2024 with plenty of bruises. The year that’s passed hasn’t been kind with massive wildfires, high interest rates, the sharp increase in the cost of living, and lately, large labour strikes weighing heavily on activity. Quebec, in fact, is one of only two provinces likely having fallen into a mild recession in 2023 (Newfoundland and Labrador, the other). We expect 2024 to be kinder, though just barely. And any noticeable improvement in the outlook might come only in the back half of the year once cuts in interest rates provide relief and trading partners turn their situation around. We project annual growth to remain sluggish overall, inching higher from 0.3% in 2023 to 0.4% in 2024.
Quebec’s economy is slowing down
2017201820192020202120222023275B300B325B350B375B400B
NEW BRUNSWICK – Weaker trade dims growth outlook
New Brunswick’s economy has geared down significantly from the pandemic recovery’s high point. Indeed, this provincial economy has already posted one of the steepest slowdowns in growth between 2021 (+5.3%) and 2022 (+1.1%) of all provinces. Though strong in-migration and relatively low debt burdens support a robust household sector, headwinds from a softening global economy are picking up and holding back provincial exports. As such, we’ve downgraded our 2023 forecast to 1.1% from 1.4%. We expect the provincial economy to decelerate further to 0.9% in 2024, making New Brunswick the only Maritime province to experience a further slowdown in the year ahead.
New Brunswick exports dwindle
Jan ’22Apr ’22Jul ’22Oct ’22Jan ’23Apr ’23Jul ’23Oct ‘230M500M1000M1500M2000M2500M
NOVA SCOTIA – Investment boost strengthens growth outlook
Recent data suggests Nova Scotia may be struggling more in 2023 than we initially thought. Deteriorating affordability has weakened the housing market, pushing year-to-date resales down in Nova Scotia more than any other province (+20% y/y). And though non-residential construction investment has been strong in 2023, softness on the residential side has been a drag on total construction investment. Manufacturing shipments have also come down as the province’s largest export markets brace for recession. All in all, we think growth will be quite a bit softer than our September forecast. At 0.8%, Nova Scotia’s economy is likely to trail behind the Canadian average in 2023 before making a modest rebound in 2024 (+1.2%).
Nova Scotia sees buyer enthusiasm fade
NSNFLNBQUEONTCANALTAMANBCPEISASK-25%-20%-15%-10%-5%0%
PRINCE EDWARD ISLAND – Set to gather even more momentum
2024 is likely to be a slightly stronger year for P.E.I. Not only does robust population growth and easing inflation pressure support a robust outlook for household spending, but a ramp up in construction is also slated to contribute to overall growth. Though P.E.I. won’t be recovering from a particularly hard year, the province is likely to be one of three that buck the weakening trend in 2024. At 2.1%, our forecast calls for real GDP growth in P.E.I. to, once again, top all other provinces in the year ahead.
Wave of retirement to keep labour market tight in P.E.I.
MANONTSASKQUECANNFLNSALTABCNBPEI-20%-10%0%10%20%30%
NEWFOUNDLAND & LABRADOR – Energy sector to kickstart recovery
Alongside the oil production dip, a dimmer outlook for the province’s mining sector and construction investment are raising the odds that Newfoundland and Labrador’s economy will contract for a second consecutive year in 2023 (-2.0%). Better growth prospects, however, are likely on the horizon. As of November 2023, all four offshore oilfields were back into operation. A brighter outlook for the province’s key mining sector is also pencilled in for the back half of 2024 as a recovering global economy spur demand for commodities. Strength in the natural resources sector is raising the odds that Newfoundland and Labrador will be one of the few provinces to buck the weakening trend in 2024 with a growth rate of 2.0%.
Unemployment rate to linger around record-low
Forecast19801985199019952000200520102015202020250%5%10%15%20%25%
Detailed forecast tables:
Canada and United States forecast tables
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About the AuthorsAs RBC Chief Economist, Craig Wright leads a team of economists providing economic, fixed income and foreign exchange research to RBC clients. Craig is a regular contributor to a number of RBC publications and is a key player in delivering economic analysis to clients and the media through the Economics Department’s regular economic briefings.
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.
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.
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