Key Takeaways
- After solid gains in the third quarter, Canada's economic momentum is beginning to decelerate heading into the new year.
- The impact of higher prices and interest rates, combined with a recession for the U.S. in 2023, leaves the Canadian economy struggling to maintain its foothold on weakening expansion.
- We expect Canadian GDP to come in at 3.1% for 2022, the same as in our September forecast, and for Canadian growth to decelerate to a flat reading for 2023 (previously up 1.1% ).
Winter chills are likely to weigh on Canadian economic activity into the new year. After the economy's relatively solid gains for the third quarter of 2022, S&P Global Economics sees a dramatic slowdown in Canada's economic momentum in the fourth. It will likely expand by an annualized 0.2% in real terms in the fourth quarter, less than a quarter of the 1.1% pace expected for the third quarter. Growth has likely been hurt by a slowdown in household spending and residential investment as demand weakens on high prices and interest rates. Canadian exports held up surprisingly well in the third quarter and are likely to remain healthy in the fourth. But because we expect the U.S. economy to dip into a mild recession next year, trade with Canada's southern neighbor is expected to slow, keeping a cap on overall trade in 2023. Still, relatively robust energy prices this year and the next will provide an offset, keeping exports positive, likely up 2.8% next year. The impact of higher prices and interest rates, combined with a recession for the U.S. in 2023, leaves the Canadian economy struggling to maintain its foothold on weakening expansion.
Household spending continued to drive Canada's growth through the first half of the year amid resilient labor market conditions and significant excess savings. However, according to research from the Bank of Canada, half of mortgage holders with variable-rate, fixed-payments have hit their trigger rates, indicating that their payments will rise, another reason to expect a weaker household spending outlook. We continue to expect headwinds from extreme pricing pressures, together with tightening financial conditions to slow household spending significantly, as supply-chain constraints affect availability of products and inflation remains high, eroding consumers purchasing power (see chart 1). Canadian household spending will likely decelerate sharply next year, with consumer spending growing by 2.1% in 2023, less than half the pace of 5.4% expected for last year.
Chart 1
Furthermore, the U.S. faces even more headwinds from higher prices and an aggressive Federal Reserve through 2023. And with purchasing power already squeezed by high prices, Canada's economy is also expected to weaken dramatically next year, exacerbated by cumulative rate hikes from the Bank of Canada as it clamps down on inflation. We now see the Canadian economy contracting in the first half of next year, with a flat reading for GDP in 2023, a marked deceleration from its robust pace of 3.1% growth in 2022.
For the U.S., we expect 1.9% GDP growth in 2022, helped by solid economic activity in the third quarter. But as the U.S. economy weakens heading into next year, with a shallow recession in the first half and only moderate recovery in the second, we expect U.S. growth will decline by 0.1% for 2023 (it was up 0.2% in our last U.S. forecast in September). Weakened U.S. economic activity will keep a lid on growth in Canada next year (see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect).
Against this backdrop, we now expect the Canadian economy will slow at the end of the year. We continue to expect GDP to come in at 3.1% for 2022 the same as in our September forecast. But we expect Canadian growth will then decelerate to a flat reading for 2023 (previously up 1.1% for 2023 in our September forecast). The GDP path remains below the pre-pandemic 2018-2019 trend rate, highlighting what was lost (see chart 2).
Chart 2
| S&P Global Ratings Economic Outlook For Canada (Baseline) | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (% change) | ||||||||||||||||||||||||||||||||||
| 2022 | 2023 | Year | ||||||||||||||||||||||||||||||||
| Q4 2021 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |||||||||||||||||||
| Real GDP | 6.5 | 3.1 | 3.2 | 1.1 | 0.2 | (0.9) | (1.0) | 0.7 | 0.4 | (5.2) | 4.6 | 3.1 | 0 | 1.1 | 1.9 | 2.3 | ||||||||||||||||||
| GDP components (in real terms) | ||||||||||||||||||||||||||||||||||
| Domestic demand | 7.0 | 5.2 | 9.3 | (3.5) | 0.6 | (2.1) | (1.9) | 0.7 | 1.0 | (5.8) | 6.5 | 4.6 | (0.5) | 1.0 | 1.9 | 2.3 | ||||||||||||||||||
| Consumer spending | 1.7 | 2.6 | 9.5 | 3.3 | 1.0 | 1.5 | 1.1 | 1.8 | 1.8 | (6.0) | 4.9 | 5.4 | 2.1 | 1.9 | 2.1 | 2.6 | ||||||||||||||||||
| Residential construction | 12.4 | 7.3 | (27.6) | 7.3 | 2.3 | (6.8) | (4.3) | (1.6) | (4.2) | 4.3 | 15.3 | (6.3) | (3.8) | (3.3) | 0.1 | 0.4 | ||||||||||||||||||
| Exports of goods & services | 13.8 | (8.9) | 11.0 | 12.9 | 4.5 | (2.6) | 0.6 | 1.3 | 2.7 | (9.7) | 1.4 | 3.6 | 2.8 | 2.1 | 1.9 | 1.6 | ||||||||||||||||||
| Imports of goods & Ssrvices | 16.9 | (1.4) | 30.5 | (1.4) | 4.8 | (6.8) | (0.9) | 1.1 | 4.8 | (10.8) | 8.2 | 8.0 | 0.8 | 1.6 | 1.6 | 1.4 | ||||||||||||||||||
| CPI | 4.7 | 5.8 | 7.4 | 7.1 | 6.1 | 5.0 | 2.7 | 1.6 | 1.4 | 0.7 | 3.4 | 6.6 | 2.7 | 1.4 | 2.0 | 2.0 | ||||||||||||||||||
| Core CPI | 3.9 | 4.9 | 5.9 | 5.9 | 4.9 | 4.6 | 3.3 | 2.0 | 2.1 | 1.2 | 2.8 | 5.4 | 3.0 | 1.2 | 2.0 | 2.0 | ||||||||||||||||||
| Nonfarm unit labor costs | (0.1) | 11.5 | 8.1 | (4.8) | 3.1 | 0.4 | 0.8 | 1.1 | 2.1 | 3.7 | 4.7 | 5.7 | 1.0 | 2.2 | 2.5 | 1.3 | ||||||||||||||||||
| Levels | ||||||||||||||||||||||||||||||||||
| Unemployment rate (%) | 6.3 | 5.8 | 5.1 | 5.2 | 5.3 | 5.7 | 6.2 | 6.5 | 6.3 | 9.6 | 7.4 | 5.3 | 6.2 | 6.0 | 5.0 | 4.7 | ||||||||||||||||||
| Bank of Canada policy rate (%) | 0.3 | 0.5 | 1.5 | 3.3 | 3.8 | 4.4 | 4.4 | 4.4 | 4.2 | 0.3 | 0.3 | 3.8 | 4.2 | 3.4 | 2.3 | 2.2 | ||||||||||||||||||
| 10-year Treasury note yield (%) | 1.6 | 1.9 | 2.9 | 3.4 | 3.4 | 3.5 | 3.3 | 3.2 | 3.0 | 0.7 | 1.4 | 2.9 | 3.2 | 2.8 | 2.7 | 2.6 | ||||||||||||||||||
| Current account (bil. C$) | 0.8 | 8.8 | 4.4 | 18.7 | 21.7 | 16.0 | 13.0 | 14.7 | 6.4 | (29.2) | 0.8 | 13.4 | 12.5 | 3.9 | 26.7 | 29.6 | ||||||||||||||||||
| Saving rate (%) | 6.9 | 9.5 | 6.2 | 2.7 | 3.3 | 3.1 | 2.8 | 2.8 | 2.7 | 14.5 | 11.2 | 5.4 | 2.8 | 2.9 | 3.4 | 3.3 | ||||||||||||||||||
| Q--Quarter. CPI--Consumer Price Index. Note: 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, and quarterly levels of CPI and core CPI represent year-over-year growth rate during the quarter. Source: Statistics Canada, S&P Global Market Intelligence, S&P Global Economics forecasts. | ||||||||||||||||||||||||||||||||||
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 |
| Research Contributors: | Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
| Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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