Key Takeaways
- Our 2022 GDP growth forecast for Canada remains at 3.7%. Economic activity is benefiting from the improving health situation (amid vaccination progress), which has increased mobility and boosted demand, particularly for services, as well as lifted hiring.
- This will give away to downside pressures from higher prices and interest rates, with GDP softening to 2.6% in 2023 and 1.9% in 2024 from 2.7% and 2.1%, respectively.
- The main risks to growth are continued supply chain disruptions, exacerbated by the Russia-Ukraine conflict; higher prices, particularly for food and energy; and tighter interest rate policy.
The Canadian economy continues to strengthen as the improving health situation, amid vaccination progress, has helped lift mobility and boosted demand, particularly for services, as well as increased hiring. But, as job creation (thankfully) climbs higher, government transfers to households will slow this year, offsetting some of the gains. We already anticipated that with several government support programs withdrawn in the fourth quarter, labor and capital supply constraints will linger into next year, and elevated inflation could eat into purchasing power.
We're maintaining our Canadian GDP growth forecast at 3.7% in 2022. This will give away to pressures from higher prices and interest rates, exacerbated by the Russian-Ukraine conflict, with GDP softening to 2.6% in 2023 and 1.9% in 2024, from 2.7% and 2.1%, respectively (see chart 1). The higher interest rate is offset by additional public investment by the government.
Chart 1
Our baseline forecast assumes the drag on spending from COVID-19 will continue to wane. High vaccination rates, at 81.7% as of March 7, should reduce the need for major social restrictions with consumer spending, particularly for services, strengthening this year. That said, downside risks to growth from COVID-19 can't be brushed off just yet, especially with news of a new variant. The possibility of worsening fatalities could reverse some reopening trends domestically (especially considering the recent wave of COVID-19 in Europe).
However, the far more pressing concerns for the Canadian economy and the world revolve around the Russian-Ukraine military conflict. The Russian-Ukraine conflict is now front and center, worsening pricing pressures in Canada as supply chain disruptions, which only recently started to show signs of improvement, deteriorate further. The impact on the Canadian economy is moderate compared with the pain felt in countries closer to the conflict, but ramifications are still noticeable.
S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. Potential effects could include dislocated commodities markets--notably for oil and gas--supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. As the situation evolves, we will update our assumptions and estimates accordingly. See our macroeconomic and credit updates here: Russia-Ukraine Macro, Market, & Credit Risks.
Risks To The Forecast: Impact Of Russia-Ukraine Conflict And Higher Interest Rates
The main factors that could slow growth this year and next are:
- Continued supply chain disruptions, exacerbated by the Russia-Ukraine conflict;
- Higher prices, particularly for food and energy; and
- Tighter Bank of Canada (BoC) interest rate policy.
With purchasing power squeezed and higher interest rates increasing monthly borrowing costs, household spending will slow later this year and into next year. We see the Consumer Price Index (CPI) peaking at 5.9% year over year in second-quarter 2022 and 3.4% for the year and then easing to around 2.1% for 2023 as the BoC stomps out higher prices with tighter monetary policy. We now expect at least four rate hikes this year and two the following year.
Table 1
| S&P Global Ratings' Canada Economic Forecast | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 2022 | ||||||||||||||
| 2020 | 2021 | 2022f | 2023f | 2024f | 2025f | |||||||||
| Real GDP (year % change) | (5.2) | 4.6 | 3.7 | 2.6 | 1.9 | 2.2 | ||||||||
| November 2021 GDP forecast | (5.3) | 5.0 | 3.7 | 2.7 | 2.1 | 1.5 | ||||||||
| Household real final consumption (year % change) | (6.1) | 5.1 | 5.6 | 3.6 | 2.3 | 2.3 | ||||||||
| Real equipment investment (year % change) | (15.4) | 7.1 | 7.0 | 3.8 | 3.4 | 3.3 | ||||||||
| Real nonresidential structures investment (year % change) | (10.0) | (0.6) | 2.1 | 3.8 | 3.4 | 3.3 | ||||||||
| Real residential investment (year % change) | 4.3 | 15.4 | (3.6) | (1.7) | 0.6 | 3.6 | ||||||||
| Core CPI (year % change) | 1.1 | 2.3 | 3.4 | 2.1 | 1.9 | 1.9 | ||||||||
| Unemployment rate (%) | 9.6 | 7.4 | 6.4 | 6.4 | 6.2 | 6.1 | ||||||||
| Housing starts (annual total in thousands) | 0.2 | 0.3 | 0.2 | 0.2 | 0.2 | 0.2 | ||||||||
| MLS house price index (year % change) | 8.5 | 22.4 | 18.8 | (12.4) | (9.3) | (1.9) | ||||||||
| 10-year government bond yield (%) | 0.8 | 1.4 | 2.2 | 2.6 | 2.8 | 2.9 | ||||||||
| Bank of Canada policy rate (year-end %) | 0.56 | 0.25 | 1.25 | 1.75 | 2.00 | 2.00 | ||||||||
| Note: All "year % change" are annual averages percent change. Core CPI is Consumer Price Index excluding energy and food components. f--forecast. Sources: Statistics Canada, Oxford Economics, and S&P Global Economics Forecasts. | ||||||||||||||
A dip in sentiment owing to high uncertainty
The share of Canadians expecting a stronger national economy in the next half-year slid 1.2% to 23.5%, and Canadians preparing for a weaker performance remains just below 50% (for the week ended March 18), highlighting that increased uncertainty stemming from the Ukraine-Russia conflict is weighing on sentiment (see chart 2). That said, domestic activity, is expected to remain healthy in the second quarter as people celebrate the lifting of COVID-19-related restrictions. As of March 10, restaurant reservations, on average, are 6% above their precrisis level (see chart 3). Air travel also picked up in March, though it remains 21% below its pre-pandemic average as the requirement of vaccination proof continues to wear on domestic travel.
Chart 2
Chart 3
Rising prices, higher rates, and supply chain issues
Domestic demand is not shielded from the rising prices and higher interest rates, potentially leading to a drag on spending activity through next year. We expect inflation to remain elevated, decreasing purchasing power and weighing on spending activity. Coupled with rate hikes, which began in March, the cost of capital is expected to increase.
Moreover, the Russia-Ukraine conflict has exacerbated both supply chain disruptions and pricing pressure, making conditions that much more challenging for central bankers as they try to stabilize prices while keeping the expansion intact. Given close to one-third of Canadian GDP is based on exports (versus less than one-eighth in the U.S.), weaker-than-expected output growth could persist due to policy choices made both domestically and by governments overseas.
Also, sanctions related to the Russia-Ukraine conflict are likely to remain in place long after the conflict ends. However, we expect Canada will be able to absorb the hit without sinking into recession, supported by still-solid household income this year (helped by a solid jobs market) cushioning higher prices at the checkout and continued trade with a healthy U.S. economy, Canada's major trading partner. Moreover, Canada's direct trade and capital flows linkages are small, suggesting only a modest impact on the Canadian economy.
Chart 4
Higher commodities prices
Merchandise exports increased more than C$13 billion in January over the implied pre-pandemic trend while merchandise imports receded. Merchandise exports are expected to grow on the back of global disruptions, with the merchandise trade balance as a percentage of GDP climbing to 0.7% in 2022. Should the Russia-Ukraine conflict persist, high commodities prices are less likely to ease. As a producer of some of these commodities, Canada can benefit as a trade substitute (see chart 5).
However, Canada imports a number of commodities from Russia, such as fertilizers, mineral fuels, and metals (see chart 6). Coupled with the slow unwinding in supply chain constraints, higher prices in these commodities will translate into higher prices at home. Moreover, concentration in several industries, such as aircraft/spacecraft and machinery/mechanical appliances, suggests that some sectors may face challenges.
Chart 5
Chart 6
Chart 7
Inflation Will Remain Elevated In 2022
Inflation dynamics have changed significantly from our last forecast, with soaring energy and food prices and higher durable goods prices due to global supply chain disruptions. In addition, the Russia-Ukraine conflict has pushed global energy, food, and metal prices higher, squeezing Canadian consumers' pockets even more.
Headline inflation jumped 5.7% year over year in February, the highest since August 1991. Not surprisingly, and a greater concern, inflation expectations have started to drift higher, with the five-year break-even inflation expectations rate nearing 3%, the upper bound of the BoC's target band (see chart 8). But while headline CPI inflation is likely to peak in second-quarter 2022 on a year-over-year basis, because of tighter monetary policy, we see it moving back to the BoC's target band of 1%-3% by the first half of 2023 (delayed by at least six months from our November forecast) (see chart 9).
Chart 8
Chart 9
We see headline CPI inflation remaining elevated throughout the next three quarters owing to the rise in agricultural commodity prices. Food inflation continues to increase, topping 6.7% in January year over year (the highest watermark in the last 12 years). Year-over-year energy inflation, at 24% in January, has remained relatively stable since our November forecast--in spite of the surge in oil prices that caused gasoline prices to accelerate by 25%. As governments negotiate energy trades with partners--other than Russia--oil prices are expected to continue receding in the second quarter, which is likely to slow energy inflation.
The BoC was indicating a hawkish stance long before the Russia-Ukraine conflict, and the conflict has only solidified its resolve. The BoC announced on March 2, after its 25-basis-point hike, that "price increases have become more pervasive, and measures of core inflation have risen," and noted that Russia's invasion of Ukraine is putting upward pressure on both energy and food prices. Together with still solid economic activity, these are all reasons for the BoC to continue tightening monetary policy into next year.
Overall, our Canadian GDP growth forecasts for 2022 are unchanged and down just slightly for 2023 and 2024. While risks are mainly to the downside, including fallout from the Russia-Ukraine conflict, higher interest rates, and rising prices, we expect a modest impact on Canada's economy.
Table 2
| S&P Global Ratings' Canada Economic Outlook | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 2022 | ||||||||||||||||||||||||||||||||
| --2021-- | --2022f-- | |||||||||||||||||||||||||||||||
| Qtr 4 | Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022f | 2023f | 2024f | 2025f | ||||||||||||||||||
| (% change) | ||||||||||||||||||||||||||||||||
| GDP growth | 6.7 | 2.7 | 4.3 | 3.0 | 2.7 | 1.0 | 3.0 | 2.8 | 1.9 | (5.2) | 4.6 | 3.7 | 2.6 | 1.9 | 2.2 | |||||||||||||||||
| Final domestic demand | 2.9 | 3.4 | 4.9 | 3.6 | 3.0 | 0.5 | 3.3 | 2.7 | 1.2 | (4.1) | 5.5 | 3.7 | 2.4 | 1.4 | 2.1 | |||||||||||||||||
| Household final consumption | 1.1 | 3.7 | 6.4 | 5.2 | 4.7 | 2.1 | 3.7 | 2.6 | 1.4 | (6.1) | 5.1 | 5.6 | 3.6 | 2.3 | 2.3 | |||||||||||||||||
| Government final consumption | 2.2 | 2.8 | 1.4 | (0.1) | (1.4) | 1.8 | 2.1 | 3.2 | 1.7 | 0.0 | 4.9 | 1.2 | (1.4) | 0.1 | 1.0 | |||||||||||||||||
| General government gross fixed capital formation | 6.2 | 9.8 | 7.9 | 5.2 | 3.6 | (0.1) | 6.5 | 2.7 | (4.2) | 6.2 | 4.5 | 6.5 | 3.3 | 0.7 | (1.2) | |||||||||||||||||
| Business gross fixed capital formation | 8.2 | 3.9 | 1.7 | 1.7 | 1.2 | (4.6) | 6.9 | (1.1) | 2.0 | (0.1) | 2.2 | 2.1 | 1.4 | 2.9 | 3.6 | |||||||||||||||||
| Residential construction | 10.2 | 0.4 | 0.5 | (0.7) | (1.8) | 3.9 | 2.3 | (1.1) | (0.2) | 4.3 | 15.4 | (3.6) | (1.7) | 0.6 | 3.6 | |||||||||||||||||
| Nonresidential construction | 11.0 | (7.9) | 3.0 | 3.7 | 3.6 | (11.8) | (1.3) | 1.2 | 4.2 | (10.0) | (0.6) | 2.1 | 3.8 | 3.4 | 3.3 | |||||||||||||||||
| Machinery and equipment purchases | 4.7 | 14.3 | 3.0 | 3.7 | 3.6 | (13.0) | 7.5 | 7.4 | 0.1 | (15.4) | 7.1 | 7.0 | 3.8 | 3.4 | 3.3 | |||||||||||||||||
| Intellectual property products | (3.9) | 18.1 | 3.1 | 3.8 | 3.7 | (1.0) | 10.2 | 14.7 | (3.8) | (3.6) | (0.4) | 7.0 | 4.0 | 3.3 | 3.6 | |||||||||||||||||
| Total exports | 13.4 | 3.6 | 8.9 | 7.1 | 5.5 | 1.4 | 1.4 | 3.8 | 2.3 | (9.7) | 1.4 | 5.9 | 5.1 | 3.2 | 2.3 | |||||||||||||||||
| Total imports | 14.4 | 2.5 | 10.4 | 8.7 | 6.3 | 0.1 | 4.6 | 3.3 | 0.4 | (10.8) | 7.4 | 6.6 | 4.3 | 1.7 | 1.8 | |||||||||||||||||
| Levels | ||||||||||||||||||||||||||||||||
| CPI inflation (%) | 4.7 | 5.5 | 5.9 | 4.9 | 3.6 | 1.4 | 1.6 | 2.2 | 2.0 | 0.7 | 3.4 | 5.0 | 1.9 | 1.8 | 2.0 | |||||||||||||||||
| Core inflation (%)* | 3.2 | 3.8 | 3.7 | 3.3 | 2.9 | 1.8 | 1.6 | 1.9 | 2.1 | 1.1 | 2.3 | 3.4 | 2.1 | 1.9 | 1.9 | |||||||||||||||||
| Employment (000s) | 19,271.8 | 19,293.8 | 19,438.1 | 19,515.2 | 19,564.0 | 17,915.8 | 18,284.7 | 18,569.4 | 18,978.5 | 18,004.4 | 18,871.8 | 19,452.8 | 19,670.9 | 19,824.6 | 19,968.6 | |||||||||||||||||
| Employment (%Y/Y) | 4.2 | 4.0 | 4.1 | 2.8 | 1.5 | 0.7 | 2.1 | 1.6 | 2.2 | (5.1) | 4.8 | 3.1 | 1.1 | 0.8 | 0.7 | |||||||||||||||||
| Unemployment rate (%) | 6.3 | 6.4 | 6.4 | 6.4 | 6.5 | 7.1 | 6.4 | 5.9 | 5.8 | 9.6 | 7.4 | 6.4 | 6.4 | 6.2 | 6.1 | |||||||||||||||||
| Average hourly earnings (%Y/Y) | 2.3 | 1.8 | 1.6 | 2.0 | 3.0 | 1.2 | 1.7 | 3.3 | 2.7 | 4.8 | 2.4 | 2.1 | 3.9 | 3.1 | 2.8 | |||||||||||||||||
| Household credit market debt (%Y/Y)§ | 8.8 | 9.7 | 8.5 | 7.9 | 6.6 | 5.1 | 5.0 | 3.7 | 4.0 | 4.0 | 8.8 | 6.6 | 4.9 | 3.0 | 3.2 | |||||||||||||||||
| Household credit market debt (% of disposable income)§ | 188.99 | 189.28 | 189.51 | 189.89 | 190.59 | 182.96 | 182.30 | 184.40 | 182.37 | 178.38 | 188.99 | 190.59 | 191.65 | 189.93 | 188.68 | |||||||||||||||||
| Bank of Canada overnight rate (%) | 0.25 | 0.33 | 0.63 | 0.88 | 1.13 | 0.50 | 0.70 | 1.40 | 1.75 | 0.56 | 0.25 | 0.74 | 1.44 | 1.91 | 2.00 | |||||||||||||||||
| Government of Canada 3-mth T-bill yield (%) | 0.10 | 0.42 | 0.68 | 0.88 | 1.09 | 0.49 | 0.69 | 1.37 | 1.65 | 0.44 | 0.11 | 0.77 | 1.52 | 1.94 | 1.98 | |||||||||||||||||
| Government of Canada 10-yr bond yield (%) | 1.58 | 1.78 | 2.11 | 2.37 | 2.58 | 1.25 | 1.78 | 2.28 | 1.59 | 0.75 | 1.36 | 2.21 | 2.63 | 2.83 | 2.92 | |||||||||||||||||
| Exchange rate, USD-CAD (period average) | 1.26 | 1.27 | 1.27 | 1.28 | 1.29 | 1.33 | 1.30 | 1.30 | 1.33 | 1.34 | 1.25 | 1.28 | 1.31 | 1.27 | 1.22 | |||||||||||||||||
| Exchange rate, USD-CAD (end of period) | 1.27 | 1.27 | 1.27 | 1.29 | 1.30 | 1.34 | 1.25 | 1.36 | 1.30 | 1.27 | 1.27 | 1.30 | 1.30 | 1.24 | 1.19 | |||||||||||||||||
| Current account balance (% of nominal GDP) | (0.12) | (0.40) | (0.09) | (0.33) | (0.15) | (3.10) | (2.80) | (2.38) | (2.04) | (1.77) | 0.06 | (0.24) | (0.44) | (1.10) | (1.25) | |||||||||||||||||
| Merchandise trade balance (% of nominal GDP) | 0.44 | 0.39 | 0.80 | 0.68 | 0.91 | (1.25) | (1.14) | (0.98) | (0.80) | (1.80) | 0.20 | 0.70 | 0.61 | (0.11) | (0.29) | |||||||||||||||||
| Crude oil (US$/bbl, WTI) | 77.44 | 94.28 | 86.83 | 81.83 | 77.83 | 43.22 | 50.91 | 64.84 | 56.99 | 39.27 | 67.98 | 85.19 | 66.21 | 52.46 | 50.00 | |||||||||||||||||
| Household saving rate (%) | 6.40 | 5.50 | 3.96 | 3.71 | 3.50 | 1.95 | 2.00 | 0.63 | 2.08 | 14.48 | 10.88 | 4.17 | 3.33 | 3.16 | 2.69 | |||||||||||||||||
| Housing starts (000s) | 0.07 | 0.06 | 0.06 | 0.06 | 0.06 | 0.20 | 0.22 | 0.21 | 0.21 | 0.22 | 0.28 | 0.24 | 0.23 | 0.24 | 0.25 | |||||||||||||||||
| Government fiscal balance (% of nominal GDP)† | (1.14) | (2.26) | (2.19) | (2.80) | (2.51) | 0.01 | 0.50 | 1.00 | 0.27 | (10.71) | (4.38) | (2.44) | (1.95) | (2.19) | (1.72) | |||||||||||||||||
| Notes: Chained (2012) dollars, quarterly change annualized and year-over-year growth for annual data. Oil price forecast source: "S&P Global Ratings Raises Near-Term Oil And Gas Price Assumptions Following Russian Invasion Of Ukraine." *Total CPI excluding food and energy. §Households excluding non-profit institutions serving households (NIPSH) at quarter and year-end. †Net lending/borrowing by federal, provincial, and local governments. f--Forecast. Source: S&P Global Economics. | ||||||||||||||||||||||||||||||||
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
| North American Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
| Contributor: | Joseph Arthur; joseph.arthur@spglobal.com |
| Research Contributor: | Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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