Statistics Canada reported that the Canadian economy increased by 1% in the fourth quarter. This followed a decline of 0.5% in the third quarter. The fourth quarter increase in gross domestic product (GDP) means that the Canadian economy avoided a recession, which is defined as two consecutive quarters of contraction.
How Is the Canadian Economy Doing?
While we may have avoided a technical recession, the country has been straddling a recession for years, thanks to anemic growth. More recently, however, interest rates, which are at their highest level since 2001, have put a damper on Canadian spending.
Canadians are renewing their mortgages at significantly higher interest rates, but to cover the extra expenses, are cutting back on consumer spending, which is resulting in lower corporate sales and earnings.
A sharp increase in mortgage costs has resulted in mortgage delinquency rates soaring in Ontario and British Columbia, the two most expensive housing markets. At the end of 2023, mortgage delinquency rates soared by 135.2% and 62% respectively. In the fourth quarter of 2023, mortgage renewals resulted in average payment increases of $457. In Ontario and B.C., the hikes were more pronounced at $680.
While Canada’s GDP expanded in the fourth quarter, it continues to decline on a per capita basis, due to surging population growth. Per capita output, which is a key indicator of Canadian household living standards, fell for a sixth straight quarter, back to its 2016 levels.
The fact is that Canadian economic growth is anemic and is expected to remain weak for much of this year. While some believe the economy will rebound later this year, the Bank of Canada will not lower interest rates until it has inflation under control.
When Will the Bank of Canada Lower Interest Rates?
The Bank of Canada was late to the party raising its interest rates to tame inflation and could do the same again when it comes to lowering interest rates. The so-called strong fourth quarter GDP growth could mean the Bank of Canada will hold off lowering interest rates until the middle of the year.
But there’s more to the “strong” fourth quarter GDP growth than meets the eye. Yes, Canadian GDP inched up 1% in the fourth quarter, but that gain was largely the result of strong export growth from the U.S., where the economy is booming. In the final quarter of 2023, Canadian consumer spending actually fell on a per-person basis with domestic demand sliding 0.7% on an annualized basis.
Inflation may not be down to its 2% target, but drawing a hard line in the sand with that goal could cause even more damage to the Canadian economy.
Higher interest rates and inflation have weakened Canadian spending and have caused the number of business insolvencies and bankruptcies to more than double in January alone. That’s 163% above pre-pandemic levels. Higher interest rates have made housing less affordable and made it more expensive to rent.
The Bank of Canada will get inflation under control, but waiting too long to lower interest rates could further weaken the economy and put further strain on Canadian finances and household affordability.
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The Canadian economy avoided a recession in the back half of 2023, but it isn’t in the clear yet. Canadian economic growth has been stagnating and with higher-for-longer interest rates, Canada’s slow economy won’t heat up any time soon. How will this economic environment impact the stock market? Ask the trading experts at Learn-To-Trade.com.
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