Canada's current economic struggles are expected to ease by the second half of next year, according to a new forecast from Deloitte Canada. The report, released on Thursday, predicts a return to growth and a reduction in the Bank of Canada's key lending rate in 2024, marking an end to the country's near-term economic difficulties.
The country's economy has entered a challenging period, with negligible growth expected over the next two quarters. "In fact, we have a few negative quarters in the forecast," said Dawn Desjardins, chief economist at Deloitte Canada and co-author of the report. This slowdown is primarily due to the Bank of Canada's ongoing efforts to curb high inflation, which have resulted in increased household debt and interest payments.
Despite these challenges, Deloitte expects the Canadian economy to start recovering in the first half of next year. "We do have an economy getting back on its feet," Desjardins explained. The recovery is anticipated to gain momentum in the second half of 2024 when the Bank of Canada is projected to lower its high interest rates.
The report also revised earlier predictions for Canada's GDP growth. It now estimates a rise of one per cent this year and 0.9 per cent next year, a significant improvement from Deloitte's previous forecast of a 0.9 per cent contraction in 2023.
However, some sectors may continue to struggle in the near term. The housing market, for instance, is expected to remain sluggish due to high interest rates and increasing numbers of households refinancing their properties to manage monthly mortgage payments. This trend could also negatively impact sales of durable goods such as refrigerators and washing machines, which consumers typically purchase when buying a new home.
Despite these headwinds, several factors are likely to support Canada's economic recovery. A stronger-than-expected U.S. outlook and continued population growth in Canada are expected to offset some of the downward pressure from high household debt and persistent inflation. Canada's population is projected to increase by 2.7 per cent this year, the highest surge since a 2.2 per cent rise in 1971.
However, this rapid population growth could outpace job gains in the coming months, leading to a rise in unemployment to 5.9 per cent early next year and potentially slowing down consumer spending. Deloitte's report also suggests that real consumption on a per capita basis dropped 1.5 per cent over the last year, aligning with falling real wages and high interest rates.
Looking ahead, Deloitte Canada estimates the overnight interest rate will fall to a neutral level of three per cent by mid-2025. While consumer spending is projected to grow by two per cent this year, it is expected to slow to a pace of 1.2 per cent in 2024.
The business sector's investment outlook remains subdued in the near term due to cost pressures and economic uncertainties dampening confidence among Canadians. However, these challenges are expected to ease as the economy recovers, setting the stage for more robust growth in the future.
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