Remember that recession that economists have been promising ever since high inflation started in the later part of 2021?
It still hasn’t materialized. But by next year, TD Economics expects Canada will see at least an economic cooling, with B.C. leading the way in terms of negative indicators.
Canadian and American economies have, so far, defied normal cycles, in which rising interest rates (intended to tame to inflation) would typically have put the brakes on an over-heated economy by now.
“At least for Canada, I think it’s really a consumer-driven propulsion that’s been to the surprise of most people,” said TD economist Marc Ercolao. “And that’s also coming from a strong labour and employment market picture that appears to be defying the physics of the traditional economic cycles.”
In its most recent provincial forecast, TD Economics has had to revise its projections for real GDP growth across Canada, based on stronger than expected household spending.
Alberta and Saskatchewan are expected to have the highest real GDP growth in 2023, at 2.7 per cent and 2.4 per cent, respectively, while B.C.’s real GDP growth is expected to be just 1.2 per cent. Ontario's real GDP growth is expected to about the same -- 1.3 per cent.
“Despite the impressive staying power of household spending across the regions, we still believe that the resilience is on borrowed time,” TD Economics says in its new provincial forecast.
“In recent months, cracks have been seen in both consumer spending and labour markets.”
TD Economics now expects unemployment rates across Canada to rise between 0.8 and 2 percentage points by the end of next year, and it warns that B.C. may finally cede its decade-long position of leading the country on positive economic indicators, like high growth and low unemployment.
"As spending and investment gears down into 2024, economic growth and job gains are likely to effectively fizzle out."
The forecast notes “industry-based GDP data” for B.C. indicated growth of 3.6 per cent in 2022.
“However, last year marked the end to a decade-long streak of growth outperformance relative to the nation,” the TD Economics provincial forecast notes. “What’s more, the provincial economy appears set for a larger cyclical downswing this year and next relative to most other provinces.”
TD Economics is forecasting B.C.’s real GDP growth will be just 0.5 per cent in 2024, and that unemployment could rise to 5.9 per cent.
“As household spending eases, B.C. firms have taken their foot off the hiring accelerator so far this year,” the provincial forecast says. “Job growth in the January-May period slowed to a more pedestrian 1.5 per cent (year-over-year), below the national pace.”
It also notes that, “despite a burst of activity related to the development of the Kitimat LNG project" (LNG Canada), construction activity in B.C. “more broadly is poised to exert a drag on the economy as capital expenditure intentions point to a 6 per cent contraction.”
To address inflation, central banks in Canada, the U.S. and elsewhere have been raising interest rates. Eventually, that can be expected to result in less spending on big-ticket items, as the cost of borrowing increases.
“We really are riding this momentum wave – this prolonged strength that’s been defying traditional economic cycles,” Ercolao said. “I think it’s the consensus that we still expect the provinces to head into the territory of choppy waters. It’s only a matter of time before the interest rates bite.
“Forward-looking, high interest rates are likely going to weigh on the B.C. consumer and businesses the most.”
On a positive note, B.C. is still very much a resource economy, and commodity prices are expected to remain relatively strong, the forecast predicts.
"Most commodity prices are still expected to remain at or above their longer-term averages, supporting activity in commodity producing provinces."
