Canada’s economy appears to be positioned for a rebound after experiencing weakness last year, but consumer spending is expected to be impacted by higher borrowing costs, tighter immigration policy and a softer labour market, according to a report.
On Tuesday, TD Economics said in a quarterly forecast that “the economy is soft, but not facing a cliff,” which will allow the Bank of Canada to be cautious while determining how restrictive interest rates need to be. The report highlights that after “no growth” during much of 2023, the economy has performed better in the first quarter of the year and is “set to turn a corner.”
“Real GDP (gross domestic product) advanced by 1.7 per cent on an annualized basis boosted by a second straight quarter of healthy three per cent annualized consumer spending,” the report said.
“Going forward, we expect the overall Canadian economy to pick up the pace from 2023’s weakness. However, the consumer is not likely to be pulling the freight.”
According to TD Economics, consumer spending is expected to “cool” due to three factors.
“First off, even though the Bank of Canada has started to cut interest rates, borrowing costs will remain much higher than the pandemic lows,” the report said.
The forecast predicts many homeowners will see their budgets “squeezed over the next two years” as upcoming mortgage renewals in 2025 will occur at higher rates than contracts in 2020 and 2021.
“Second, some tightening in immigration policy towards the end of this year should help alleviate some of the pressure on consumer spending. The three per cent growth in the past two quarters occurred against a record pace in population growth,” TD Economics said.
Lastly, the report said a “softening labour market” is likely to impact consumer spending, as Canada’s job market is “at greater risk of tipping into net losses” during the second half of the year compared to the U.S.
“The unemployment rate has already climbed a full percentage point in 12 months, and this would further push it along towards 6.7 per cent by the end of this year,” the report said.
As inflation continues to cool, TD Economics predicts the Bank of Canada will cut interest rates two more times this year, both in quarter-point moves.
Canada's economy 'set to turn a corner': TD Economics - BNN Bloomberg
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