Canadian economy grew by 1%, ending 2023 on a positive note

REAL ECONOMY BLOG | February 29, 2024

Authored by RSM Canada

The Canadian economy seems to have bottomed out and be on the rebound, growing by 0.2% in the fourth quarter of last year and by 1% on an annualized basis, exceeding expectations.

The growth gives the Bank of Canada time to see more sustained evidence of inflation moderation before cutting rates. The first rate cut most likely will occur in June. A hold at 5% at the announcement next week is all but certain.

Despite the evidence of growth in the data released by Statistics Canada on Thursday, an undeniable theme of pulling back persisted: Both total business investment and consumer spending per capita fell as the pain of high interest rates prolonged.

The slowdown in economic activity is clear as the economy grew at the slowest pace since 2016, excluding 2020, the year of the pandemic’s beginning.

Fueling the growth was a notable jump in net exports. Exports rose by 1.4% in the fourth quarter, led by exports of crude oil and travel services. At the same time, imports fell because of lower imports of auto parts and intermediate metal products.

Remarkably, the household savings rate remained stable and way above pre-pandemic levels. Where housing costs rose faster than income, consumers reduced discretionary spending, maintaining their savings rate even as mortgage interest payments have more than doubled over the past two years, and as compensation rose at the slowest pace since 2020.

This underlines a level of resiliency as Canadian households weathered the storm of elevated inflation and high interest rates.

Businesses are going to need help as soon as they can get it. Real business investments declined for the sixth time over the past seven quarters and will only go back up after rate cuts begin.

Some small and medium-size businesses that were riding on the near-zero rate wave could buckle under the strain of high rates.

Expect muted business investment through the first half of this year. It makes little sense for businesses to start projects and investing at this rate, though business activity will pick up in the second half.

Likewise, the housing market is warming up as buyers expect rate cuts, and consumers will be cautious to spend until the macro environment improves.

The data

Total household spending increased by 0.2% in the fourth quarter, but thanks to spending on vehicles as supply chain issues eased and back orders were fulfilled. Spending per capita fell for the third consecutive quarter as population growth outpaced spending growth.

Aggregate spending went up thanks to population growth. On an annual basis, household spending slowed to 1.7% last year from 5.1% the previous year.

Housing investment declined by 0.4% as the resale market was particularly quiet in the fourth quarter. Buyers put off listing their properties, aware of price drops, while buyers awaited rate cuts as high interest rates hurt affordability.

Housing’s contribution to gross domestic product last year fell sharply to 7.7% from the peak of 10% during the housing boom in 2021.

Business investments fell by 3.0% in the fourth quarter, led by falling investment in machinery and equipment of 1.4%.

At the same time, corporate incomes continued to rise at 2.9% as trade and services industries, especially telecommunications expanded.