Canadian economic update

Growth despite rising inflation and interest rates

In an exclusive presentation to RBC Investor & Treasury Services clients, Nathan Janzen, Assistant Chief Economist at RBC, discusses the economic outlook for Canada.

1. Near-term economic growth looks strong, but is slowing

Canada's near-term growth outlook remains positive despite concerns about inflation and interest rates. The economic impact of the pandemic is easing, the unemployment rate is low, wages are rising and households have accumulated a huge amount of savings through the pandemic—all of which bodes well for growth.

Growth is expected to slow later this year and into 2023 as rising inflation and interest rates weigh on consumer spending. RBC forecasts GDP growth of 4.3% in 2022, before slowing to 2% in 2023.

2. Consumer demand is outstripping supply

High demand for goods is chasing limited supply, driven by several factors ranging from supply chain issues to increased purchasing power.

Global supply chains have been an ongoing concern during the pandemic, delaying the delivery of a range of goods, from manufacturing parts to automobiles, household appliances and computers. Labour shortages are also hampering production capacity, alongside rising input costs, and will continue to be an issue even if supply chain difficulties were to be resolved quickly.

Labour shortages are hampering production capacity

At the same time, Canadian households have stockpiled an estimated $300 billion of savings amid the pandemic and are eager to spend it as the lockdowns lift.

3. Inflation is sticky

Inflation pressures have continued to build, driven by production disruptions and Russia's war on Ukraine, which have led to a surge in the price of critical commodities like oil, wheat and potash.

Canada's Consumer Price Index spiked to 6.7% in March from a year earlier1—its highest level since early 1991 when the Goods and Services Tax (GST) was introduced, and up from 5.7% in February. Inflation has now exceeded the Bank of Canada's target range of 1% to 3% for a full year. The central bank expects inflation to average more than 5% in 2022 but to ease later this year as the Bank of Canada continues to raise interest rates.

4. A rapid rise in interest rates is on the horizon

To curb inflation, many central banks worldwide are hiking interest rates more aggressively than they have in decades. Since mid-March, the Bank of Canada has hiked rates by 75 basis points, including a 50-basis-point increase in the overnight rate in early April, to 1%.

There are limits to how much the central bank will hike rates

We expect the central bank to continue raising rates relatively quickly, reaching 2% by about October this year, and then stop there. Our view is that there are limits to how much the central bank will hike rates as it’s wary of going too far and harming the economy.

5. Geopolitical tensions add to volatility and an uneven recovery

Russia's war on Ukraine has heightened geopolitical risks, adding to some of the global supply chain disruptions and inflationary pressures.

While direct trade links between Canada and Russia are small, the resulting higher commodity prices are cutting into household purchasing power. Examples include higher gas prices and rising food costs. On the flip side, Canada is a major exporter of some of these commodities, which has resulted in increased demand and more revenues flowing into regions that produce them, particularly Alberta and Saskatchewan.

6. Labour shortages are an economic drag

One of the key factors limiting economic growth across Canada is the shortage of workers. In March, the unemployment rate was 5.3%—the lowest since 1976—and there were 70% more job vacancies compared to pre-pandemic levels.

While many cite "The Great Resignation," the reality is that worker shortages have been a reality for years, long before the pandemic inspired people to re-examine their employment situation. Workers are switching jobs or quitting their jobs more often, and baby boomers are pulling back or retiring from the workforce in droves.

In March, the unemployment rate was 5.3%—the lowest since 1976

The federal government has significantly boosted immigration targets for the next few years to help fill the gaps, but that will not provide a quick fix.

7. Workers are earning more

The tight labour market has incentivized employers to pay more to attract and retain talent. Workers also feel empowered to ask for raises, particularly as their cost of living increases.

The pandemic-driven boom in demand for services involving less interpersonal contact, such as online shopping, banking and entertainment, has also created a parallel boom in employment, with more than 300,000 jobs added in “low-contact" industries.

A recent RBC report indicates that these jobs tend to pay significantly higher wages, demand more education and training, and have higher productivity rates.2 As a result, the pandemic has left Canada with a higher-paid, stronger, more productive workforce, adding a $20 billion boost to annual household wage income.

8. Housing market shows signs of cooling

As the Bank of Canada continues to raise rates, Canada's hot housing market appears to be cooling off. Higher borrowing costs will worsen stretched affordability conditions in many parts of the country, likely easing homebuyer demand.

Peak housing may be coming soon, or have already arrived, in some markets as demand-supply conditions become more balanced and extremely bullish sentiment fades. As a result, we expect some heat to come off the housing market and forecast a 5% drop in house prices, on average across Canada, by mid-2023.

Peak housing prices may be coming soon

Measures introduced in the most recent federal budget to boost the housing supply are welcomed but will take significant time to have an impact. In the meantime, there are still a lot of buyers out there chasing limited supply.

9. Risk of a recession is low—for now

There are some concerns that rates will rise too much, too quickly, putting the economy into a recession. The discussion is happening more in the United States, with some analysts forecasting a recession potential in the back half of 2023. The risk may not be as high in Canada, given rising commodity prices and their positive impact on our economy, but we aren't immune to what happens south of the border.

In our view, central banks are well aware of this risk and would work to avoid it. But it is a risk.

10. Businesses prepare to work through challenges

Small businesses are beginning to feel more confident as pandemic restrictions are lifted. According to the latest Canadian Federation of Independent Business (CFIB) Business Barometer®,3 the three-month index improved by six points to 60.2, the highest level since before the pandemic. And the 12-month optimism index rose by two points to 65.1. Still, the CFIB says many owners are concerned about higher costs, supply chain challenges and labour shortages holding back a recovery.

While rising costs are a concern for businesses of all sizes and across all sectors, increased consumer spending and the lifting of pandemic restrictions should help Canada's continued economic recovery and growth.



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  1. RBC Inflation Watch, RBC Canadian Inflation Watch, April 20, 2022
  2. RBC, Proof Point: Canada's Post-pandemic Labour Market Shakeup, April 14, 2022
  3. CFIB, Business Barometer, March 31, 2022