During autumn 2024, the Canadian economy continues to navigate a complex landscape of high inflation, elevated interest rates, and global uncertainties. In Canada, fears of recession began to rise again in most economies, but Canada bypassed it though growth remains tepid and uneven across sectors.
For instance, another fundamental development is that of moderation in inflation rates, which stood as high as 8.1% in June 2022 and further softened to about 2.8% early in 2024.
Nonetheless, the inflation rate will remain, though slightly above what the Bank of Canada considers normal, ranging between about 2% throughout the remainder of the year, mostly on account of food and shelter inflation. As for food price inflation, this will probably be around 4-5%, while housing-related costs—rent and mortgage interest rates—continue to climb much more rapidly than the rest of the sectors.
As for interest rates, Bank of Canada’s key rate remains a high 5% since 2007. Economists predict that the key rate will remain high for most of 2024, but is expected to go down in the second half of the year. Again, any decline is likely to be slow and incremental. These persistently high rates are directly tied to the need to control inflation, but remain a drag on the sectors sensitive to the cost of borrowing, most particularly housing and consumer spending.
One of the most significant markets hit by the combination of increased borrowing costs and the buoyant construction sector is the Canadian housing market. The federal government reacted to the situation by emphasizing reduced house prices in its fall economic statement, including setting up financing to construct more than 100,000 new homes and launching an affordable housing fund that is expected to come into operation in 2025.
Although the unemployment rate is expected to increase further and is projected to become 6.5% by the end of 2024, Canada’s job market is quite healthy. Since the job market has shown itself to be relatively resilient and the newly reformed government programs are targeted at removing significant barriers for internationally trained professionals who would be of high value to the healthcare and construction industries, the decline in the unemployment rate would be more suggestive of growth in the workforce rather than a general sacking.
Canada’s fiscal outlook is prudent but stable. The federal government is projecting a deficit of $38.4 billion for 2024, modestly revised from earlier projections, while still advancing on amid interest rates pressures. In this effort, the government will be working with its fiscal strategy in conscious balance between the need for economic stimulation and to gradually bring the debt-to-GDP ratio down over the medium term, supported by its relatively low marginal effective tax rate (METR), well below the average of other G7 nations.
Overall, though the headwinds of global uncertainty, rising costs, and high borrowing rates weigh on Canada’s economy, growth is still likely to be modest in the latter half of 2024. Indeed, the economy is fueled by good policy, in the form of significant intervention in housing and labour markets, and very cautious fiscal management to ensure stability over the longer term.
