Canada Country Risk Report

In addition to high interest rates, other fundamentals will negatively affect the economy in 2024. For instance, inflation is still wreaking havoc on wage earners due to its cumulative effects. Since January 2021, wages have grown a cumulative 11.5%, but food has risen 20%, shelter has risen 19% and gasoline has risen 37%. Clearly wage earners are still underwater, despite recent gains.

Consumption is also poised to slow. Consumer spending accounts for about 55% of all economic activity in Canada and consumption requires money. But income is still lagging and personal savings are dwindling. Consumers could turn to credit, but they are in a precarious position to do so – Canadians are already paying a record amount of debt service compared to their incomes. The BoC’s aggressive path of interest rate hikes has driven credit card rates to record highs and has put the five-year mortgage interest rate at the highest in 15 years. Furthermore, consumer confidence is dismal.

High mortgage rates are just part of the problem which will weigh on the housing market in 2024. Housing prices have fluctuated recently, but they are still 30% to 40% higher than they were before Covid-19. As a result, housing affordability is extremely low. Furthermore, since the BoC started signaling rate increases at the end of 2021, housing activity has plummeted and has never recovered – permits are down 13%, unit sales are down 30% and the value of residential structures is down 16%. As a result, housing will continue to be a drag on potential GDP growth in 2024. In a hypothetical scenario where the BoC cuts the overnight rate by 50 bps in 2024 and the five-year mortgage follows along, it would still be the highest in 15 years, continuing to make housing unaffordable and weighing on the housing market and the economy in general. Finally, since approximately 20% of mortgages need to be refinanced every year, homeowners who borrowed at 3%-4% a few years ago will face a steep increase in mortgage payments at 6%.

Exports will also come under pressure in 2024. It is expected that the US Federal Reserve will start to cut rates sooner and will cut more in 2024 than the BoC. As such it is likely that the Canadian dollar will strengthen vs. the US dollar. That will benefit consumers buying imports, but it will also hurt exporters to the US In addition. Exports to the US account for over 20% of GDP and an expected slowdown in the US will furthermore reduce demand for Canadian goods and services.
The labor market has been a bright spot, having created jobs at a strong rate and driving the unemployment rate to a record low. However, on a y/y basis, job growth slowed from 6.1% in May of 2022 to 2.5% in November 2023 and a decline that rapid is often a sign of an oncoming slowdown. The unemployment rate has risen rapidly from 5% to 5.8% in just eight months and job openings as measured by Indeed have declined by 52% in the 12 months ended in November 2023.

Most leading indicators also point to decay. The yield curve remains deeply inverted. The BoC’s Business Outlook survey has fallen for three consecutive quarters and is now well into contractionary territory and 47% of the respondents said that the effects of monetary policy are “just beginning.” The Canadian Federation of Independent Business (CFIB) Business Barometer survey projects poor business performance over the next three and 12 months. One positive leading indicator is the Ivey Purchasing Manager’s Index (PMI), which has remained in expansionary territory for all the post-Covid-19 era.