When the Bank of Canada held its interest rate steady last week it acknowledged the economy was slowing.
But by how much? The public mostly hears headline economic numbers, but when you look through the lens of population growth an even bleaker picture comes into focus.
A recent report by Desjardins argues that the population boom is masking the full extent of Canada’s economic gloom.
“Surging population growth — the highest since the 1950s — has provided a tailwind to headline economic activity since mid-2022,” said Randall Bartlett, Desjardins’ senior director of Canadian Economics.
The newcomers, who bought cars and home furnishings as they settled in, boosted the economy so that it appeared to “defy the gravitational pull of high interest rates,” he said.
When measured on a per capita basis, however, real gross domestic product has fallen in each of the past four quarters and growth in domestic demand has fared even worse, he said.
Much of the weakness is due to a drop in interest-rate-sensitive sectors like housing, but consumption of non-durable goods like gas and food, and investment in machinery and equipment have also declined on a per capita basis.
Also, the lack of business investment in Canada is alarming, said Bartlett.
An unprecedented number of the newcomers are non-permanent residents, including temporary workers who came to Canada to fill specific labour shortages.
“Instead of investing in productivity-enhancing technology, it appears that businesses have been addressing labour shortages with temporary foreign labour,” he said. This has increased hours worked but lowered productivity.
In fact, data released this month showed that Canadian businesses are less productive now than at any point since 2017.
“Looking ahead, souring sentiment suggests business investment isn’t likely to pick up anytime soon,” said Bartlett.
The Bank of Canada’s latest Business Outlook Survey showed investment intentions for companies outside of natural resources sectors were the lowest since 2020.
And “flagging consumer confidence portends a similar fate for household consumption,” he said.
Meanwhile in the United States the economy grew by over 2 per cent in the second quarter, while Canada’s economy contracted, showing “the divergence between the two economies,” said economists at BMO Capital Markets.
They now think that Canada’s landing will be “a bit bumpier,” and have cut their estimates for 2023 GDP growth to 1.1 per cent and 0.6 per cent next year, both lower than their forecasts for the United States.
There are several reasons why Canada’s economy is lagging the U.S., “notably in per-capita terms,” said BMO senior economist Sal Guatieri — and one of them is that while labour productivity is rising in the U.S. it continues to fall in Canada.
Canadians are also more indebted and thus more sensitive to higher interest rates, American households are spending more of their excess savings, and Canada’s governments have pulled back on subsides and tax incentives, unlike their neighbours to the south.
One thing the slumping economy may do is keep the Bank of Canada on the sidelines. BMO expects no change in the 5 per cent policy rate until late next spring, when the Bank will gradually begin to cut rates.
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When the Bank of Canada paused interest rate hikes earlier this year it put a spring in the step of Toronto’s housing market. But don’t look for that same bounce after this latest pause, says BMO Capital Markets senior economist Robert Kavcic, because this time “the headwinds are stiffer.”
The market has seen a surge in new listings, there are signs the job market is weakening, and mortgage rates have climbed higher. Kavcic said the lowest fixed-rate mortgage available is now about 100 basis points higher than the best option offered during the spring rally.
“This all suggests that we won’t see the same forceful bounce this time around…,” he wrote.
BMO Capital Markets’ 24th Annual Media & Telecom Conference
The Economic Club of Canada in Toronto hosts a panel discussion on the housing affordability crisis in Canada with Michael Bourque, CEO of the Canadian Real Estate Association
Ottawa’s parliamentary budget officer will post an “break-even” analysis of government subsidies to the Stellantis-LG Energy Solutions and Volkswagen battery factories in Ontario.
The Greater Vancouver Board of Trade hosts an event entitled “The Critical Question – How Can Canada Build More Mines Faster?”
Today’s Data: U.S. NFIB Small Business Economic Trends Survey
Earnings: Roots Corp.
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