Key Takeaways
- GDP growth: Headwinds against household consumption and an expected recession in the U.S., Canada's major trading partner, will likely hurt the Canadian economy next year. Geopolitical uncertainties, weakness in the U.S., and the ramifications of inflation and monetary policies at home will keep growth moderate into next year. We now expect growth to slow to 1.1% in 2023 (compared with the 1.9% we projected in our June forecast).
- Labor force: The jobs market remains tight as more people return to the labor force. Nonetheless, there have been net job losses in three consecutive months, while job postings continue to decline. We expect the labor market to weaken modestly in response to tighter monetary policy.
- Unemployment: The unemployment rate, at 5.4% in August (just below the pre-pandemic level), is expected to rise through early 2024. With economic pressures worsening as the central bank continues tightening the screws and U.S. economic activity weakens, business demand for labor shrinks. We now expect the unemployment rate to climb to 5.9%, on average, in 2023 from 5.3% in 2022.
- The BoC: By the end of the year, the central bank will likely raise policy rates an additional cumulative 150 basis points to 3.75%. The bank will keep both monetary tools--rate hikes and quantitative tightening--for as long as excess demand and the tight labor market continue to push prices. We expect the bank to cut rates starting in second-quarter 2023 as inflation begins to moderate. Core inflation, excluding food and fuel, is expected to reach the BoC's target of 2.0% by fourth-quarter 2023.
After solid, post-lockdown gains in the second quarter, Canada's economic momentum has begun to slow. It will likely expand by an annualized 0.4% in real terms in the third quarter, a sliver of the 3.1% pace in the second quarter. Growth has been hurt by slowdowns in household spending and trade. Exports also moderated in the third quarter, though they're still healthy after solid gains the prior quarter. As we expect the U.S. economy to dip into a shallow recession next year, trade with Canada's southern neighbor is expected to slow, keeping a cap on overall trade next year. Still, healthy energy prices this year and next will provide an offset, keeping exports up by 5.6% next year. Despite the overall slowdown in economic activity relative to our June forecast, the Canadian economy remains resilient in the face of high prices, exacerbated by the Russian-Ukraine military conflict and the China slowdown.
That said, we still expect Canadian economic activity to decelerate starting in the second half of 2022 as higher prices and higher interest rates weigh on growth. As the U.S. faces even more headwinds from higher prices and an aggressive Federal Reserve through 2023, Canada will also have slower growth next year as cumulative rate increases from the BoC, clamping down on inflation, take hold.
For the U.S., we expect just a 1.4% growth rate in 2022. With a shallow recession in the first half of 2023 and only moderate recovery in the second half, we expect U.S. growth to decelerate to just 0.3% for the year. This feeble growth next year will keep a lid on economy activity in Canada. This forecast is much slower than the growth of 1.8% in 2022 and 1.6% in 2023 that was expected in June, when we did our last U.S. forecast.
Against that backdrop, we now expect the Canadian economy to slow after a healthy first half of the year. GDP is expected to come in at 3.1% in 2022 but decelerate to just 1.1% next year (these figures were 2.9% and 1.9%, respectively, in our June forecast). The GDP path remains below its pre-virus 2019-2019 trend rate, highlighting what was lost (see chart).
| S&P Global's Economic Outlook For Canada (Baseline) | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 2022 | ||||||||||||||||||||||||||||||||||
| 2021 | --2022-- | --2023-- | ||||||||||||||||||||||||||||||||
| Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | 2019 | 2020 | 2021 | 2022f | 2023f | 2024f | 2025f | |||||||||||||||||||
| (% change) | ||||||||||||||||||||||||||||||||||
| Real GDP | 6.6 | 3.1 | 3.3 | 0.4 | 0.1 | 1.3 | 1.1 | 1.7 | 1.2 | 1.9 | (5.2) | 4.5 | 3.1 | 1.1 | 1.9 | 2.1 | ||||||||||||||||||
| GDP components (in real terms) | ||||||||||||||||||||||||||||||||||
| Domestic demand | 7.2 | 5.0 | 9.5 | (1.8) | (1.1) | 0.6 | 1.1 | 1.1 | 1.0 | 1.3 | (5.9) | 6.5 | 4.7 | 0.7 | 1.4 | 2.0 | ||||||||||||||||||
| Consumer spending | 1.9 | 3.3 | 8.9 | 3.3 | 1.1 | 1.3 | 0.9 | 1.8 | 1.5 | 1.4 | (6.1) | 4.9 | 5.6 | 2.0 | 1.7 | 2.2 | ||||||||||||||||||
| Residential construction | 12.4 | 18.1 | (34.2) | 72.8 | 0.0 | (6.3) | (3.6) | (2.2) | (3.4) | (0.2) | 4.3 | 15.3 | 0.0 | 1.3 | (2.8) | 0.2 | ||||||||||||||||||
| Exports of goods and services | 13.8 | (9.3) | 11.1 | 8.0 | 4.4 | 6.3 | 3.4 | 4.5 | 5.7 | 2.2 | (9.6) | 1.5 | 2.9 | 5.6 | 3.8 | 1.9 | ||||||||||||||||||
| Imports of goods and services | 16.9 | (2.8) | 30.1 | (2.7) | 0.1 | 3.7 | 3.2 | 2.6 | 4.7 | 0.4 | (10.5) | 7.9 | 7.0 | 3.5 | 2.1 | 1.6 | ||||||||||||||||||
| CPI | 4.7 | 5.8 | 7.4 | 7.2 | 6.2 | 6.1 | 4.2 | 3.5 | 2.9 | 2.0 | 0.7 | 3.4 | 6.7 | 4.2 | 1.2 | 2.0 | ||||||||||||||||||
| Core CPI | 3.9 | 4.9 | 5.9 | 5.4 | 4.4 | 3.7 | 2.8 | 2.6 | 2.3 | 1.8 | 1.2 | 2.8 | 5.2 | 2.8 | 1.6 | 1.8 | ||||||||||||||||||
| Nonfarm unit labor costs | (0.1) | 11.3 | 8.3 | (6.8) | 0.7 | (1.8) | 1.7 | 0.8 | (0.3) | 2.5 | 3.7 | 4.7 | 5.3 | (0.3) | 1.0 | 1.1 | ||||||||||||||||||
| Levels | ||||||||||||||||||||||||||||||||||
| Unemployment rate (%) | 6.3 | 5.8 | 5.1 | 5.0 | 5.3 | 5.9 | 6.0 | 5.9 | 5.9 | 5.8 | 9.6 | 7.4 | 5.3 | 5.9 | 5.7 | 5.5 | ||||||||||||||||||
| Bank of Canada policy rate (%) | 0.3 | 0.5 | 1.5 | 2.8 | 3.8 | 3.8 | 3.7 | 3.4 | 3.1 | 1.8 | 0.3 | 0.3 | 3.8 | 3.1 | 2.4 | 2.2 | ||||||||||||||||||
| 10-year Treasury note yield (%) | 1.6 | 1.9 | 2.9 | 2.8 | 2.9 | 2.9 | 3.0 | 3.0 | 3.0 | 1.6 | 0.7 | 1.4 | 2.6 | 3.0 | 3.0 | 3.1 | ||||||||||||||||||
| Current account (Bil. $) | (0.3) | 15.8 | 10.9 | 33.3 | 14.9 | 20.3 | 18.9 | 23.3 | 26.4 | (35.4) | (29.2) | 0.8 | 18.7 | 22.2 | 22.8 | 29.7 | ||||||||||||||||||
| Saving rate (%) | 6.9 | 8.1 | 6.2 | 2.4 | 2.3 | 1.9 | 1.9 | 1.8 | 1.5 | 2.1 | 14.5 | 11.2 | 4.7 | 1.8 | 1.3 | 1.1 | ||||||||||||||||||
| Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year ago. Quarterly levels represent average during the quarter; annual levels represent average levels during the year. Quartery levels of housing starts and unit sales of light vehicles are in annualized millions. Quartery levels of CPI and core CPI represent the year-over-year growth rate during the quarter. Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. f--Forecast. | ||||||||||||||||||||||||||||||||||
The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
| North America Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
| Contributor: | Joseph Arthur, Des Moines; joseph.arthur@spglobal.com |
| Research Contributor: | Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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