According to Deloitte Canada’s economic outlook report, Canada is expected to avoid a recession despite facing challenges such as sticky inflation, rising business insolvencies, and increasing mortgage delinquencies. The Bank of Canada has raised interest rates from near zero to five percent to combat inflation, but it is anticipated that interest rate cuts will begin in June or July. While the economy is projected to remain “stuck in neutral” in 2024, real GDP growth is predicted to reach 2.9 percent in 2025.
Deloitte’s forecasts are based on assumptions like robust GDP growth in the U.S., ongoing softening of inflation, interest rate cuts by the Bank of Canada, and a steady influx of newcomers to support demand. Recent data from Statistics Canada indicated a 0.6 percent increase in GDP in January with a preliminary estimate of 0.4 percent growth in February. The economic recovery hinges on interest rate cuts, which in turn depend on inflation continuing to moderate. However, housing costs remain a significant barrier as Canadians renew mortgages at higher rates, impacting both homeowners and renters.
The report highlights that wage pressures are outpacing inflation, driving up unit labor costs for businesses and making it challenging to contain inflation. While the labor market remains strong, Deloitte predicts that employment gains will slow in 2024. Household spending is expected to remain modest in the first half of the year as consumers grapple with the increased cost of living. However, as interest rates decrease, the economy improves, and pent-up demand is unleashed, next year is expected to see better results. Business investment is decreasing at a concerning rate, with high-interest rates likely hindering the recovery in this area.
In comparison, the U.S. economy has fared better under interest rate hikes, with the country’s central bank also expected to begin cutting rates later in the year. Deloitte anticipates that the U.S. economy’s strength will somewhat moderate in the coming months but remain positive, with real growth projected at 2.4 percent in 2024 and 1.4 percent in 2025. The report notes that elevated interest rates in Canada are impacting businesses, leading to a delay in investment plans and a focus on maintenance and repair instead of expansion. Overall, while Canada faces near-term challenges, it is expected to avoid a recession and begin recovering in the second half of the year.
