Canada’s near-term economic struggles are expected to ease next year, according to a new forecast from Deloitte Canada. The company predicts that growth will return and the Bank of Canada will begin cutting its key lending rate. This positive outlook is attributed to a better-than-expected U.S. economic forecast and continued population growth in Canada. These factors are expected to counterbalance the downward pressure from high household debt, soaring interest payments, and persistent inflation. Dawn Desjardins, the chief economist at Deloitte Canada, co-authored the report and stated that the economy is projected to recover in the first half of next year.
Despite this optimistic view for the future, Deloitte Canada acknowledges that the next two quarters for the Canadian economy are going to be tough. Desjardins states that the Canadian economy has entered a rough patch and anticipates negligible growth during this period. In fact, the report indicates that there could be a few negative quarters in the forecast. This slowdown is a result of the Bank of Canada’s efforts to curb high inflation, which have led to increased household debt and interest payments. Desjardins expects this trend to continue in the near term. She also notes that a third of Canadian households have a mortgage, and many are struggling to make monthly payments, leading to increased refinancing activities.
The housing market is also expected to be relatively sluggish in the near term, which will have an impact on other sectors as well. When the housing market slows down, people are less likely to purchase durable goods like appliances, affecting consumer spending. Despite these challenges, Deloitte Canada believes that strengthening U.S. trade and population growth in Canada will help the country avoid a more severe recession. Canada’s population is set to increase by 2.7 percent this year, the highest surge since 1971.
However, economists warn that population growth may outpace job gains in the coming months, resulting in a higher unemployment rate. A decrease in hiring would lead to slower consumer spending. Deloitte Canada adjusted its expectations for consumer spending due to the record-high population surge, stating that real consumption per capita dropped by 1.5 percent over the past year. This is consistent with falling real wages and high interest rates, which have put strain on budgets.
The report projects that consumer spending will grow by two percent this year but slow down to 1.2 percent in 2024. Deloitte Canada also estimates that the overnight interest rate will fall to a neutral level of three percent by mid-2025. For the business sector, the report indicates that the investment outlook remains muted in the near term due to cost pressures and economic uncertainties, which have impacted confidence among Canadians.