The Canadian economy managed to avoid a recession and experienced modest growth in the last quarter of 2023, despite the challenges posed by persistently high interest rates affecting both consumers and businesses. According to Statistics Canada, the real gross domestic product (GDP) saw an annualized increase of 1% in the final three months of the year, surpassing both economists’ forecasts and the Bank of Canada’s predictions.
James Orlando, TD’s Director of Economics, highlighted the ongoing impact of high interest rates, noting that Canada is currently in a period of slow growth that is likely to continue as long as these rates remain elevated. This slow growth follows a 0.5% decline in GDP in the third quarter. The growth in the fourth quarter was primarily fueled by an uptick in exports, even as housing and business investments declined.
Statistics Canada also noted that, excluding the unprecedented year of 2020, the economic growth rate in 2023 was the slowest since 2016. Additionally, December saw no growth in real GDP, with a contraction in goods-producing industries and a strike among Quebec’s public sector workers contributing to this stagnation.
The rise in business insolvencies by 41% and consumer insolvencies by 23% in 2023, compared to 2022, underscores the financial strains businesses and consumers are facing due to accumulated pandemic debt and the high-interest rate environment.
Despite these challenges, Douglas Porter, BMO’s Chief Economist, remarked that the Canadian economy is “grinding forward,” aided by strong spending trends in the U.S. that have bolstered Canadian exports. However, he acknowledged that growth remains weak, particularly on a per capita basis, with real GDP per capita dropping over two percent from the previous year.
The Bank of Canada has maintained its key interest rate at 5%, the highest since 2001, leading to higher mortgage renewal rates and reduced consumer spending. This, coupled with strong population growth, has resulted in a continued decline in consumer spending per capita, even though overall consumer spending increased in the quarter.
A preliminary estimate suggests a 0.4% growth in real GDP for January, although this figure is subject to revision. Orlando expressed caution regarding these early estimates, citing internal TD data that indicates a reduction in consumer spending.
The upcoming Bank of Canada interest rate decision is highly anticipated, with expectations leaning towards a rate cut as inflation shows signs of easing and the high rates continue to dampen economic growth. Although the stronger-than-expected economic performance may lessen the immediate need for a rate cut, most economists foresee a reduction in the central bank’s key rate around mid-year. However, the bank’s upcoming decision will be closely watched for indications of its future monetary policy direction.
