Not even Canada’s record population growth can prevent its economy from slowing. Statistics Canada (Stat Can) reported the country’s real gross domestic product (GDP) growth slowed in February. The final numbers showed just a third of the growth rate the agency anticipated in their preliminary estimate. Not even the demand boost from a record population increase has been able to prevent this slowdown.
Canada’s Economy Is Slowing More Rapidly Than Forecast
Canada’s economy is slowing down much faster than expected. Real GDP grew 0.1% in February, a big miss when compared to the 0.3% preliminary estimate from Stat Can. After a surprising 0.6% climb in January, it seemed like Canada was faring better than most had anticipated. That’s no longer the case.
Stat Can’s preliminary estimate for March shows expectations are further eroding. The agency’s preliminary real GDP estimate is a 0.1% contraction in March. Its primary drag is slowing consumer spending, which was partially offset by more public sector expansion.
“The surge in GDP in January increasingly looks to have been a head-fake, with activity softening over February and March,” said Nathan Janzen, assistant chief economist at RBC.
Adding, “and consumer spending headwinds continue to build as higher interest rates flow gradually through to household borrowing costs with a lag.”
Canada’s Economy Is Slowing Despite Its Population Boom
The growth, or lack of, is shocking when you factor in the record population boom. Canada’s population grew by an estimated 273k people in Q1 2023, and 362k people in the prior quarter. Since real GDP is taken at the aggregate, adding over half a million people within six months should have provided a boost. That wasn’t the case, meaning things are much worse on the ground.
Real GDP is measured in aggregate, meaning more people should increase output. After all, everyone consumes and most of Canada’s growth has been prime age workers. Despite low employment and a surge in demand, the additional people aren’t resulting in many “productive” economic gains. The growth is hiding the cracks appearing in Canada’s economy.
Most of the country’s remaining growth is basic services to accommodate the population. Stat Can noted the expansion of the public sector, including education, healthcare, and social assistance, was the biggest contributor to real GDP growth in February. It increased 0.2% in February, up for a 13th consecutive month.
Construction was another one of the top contributors, rising 0.3% in February. That’s 3x faster than the rate of the general economy, and the fifth consecutive month it’s expanded. Stat Can noted that construction was driven largely by residential building. We often joke around here that Canada’s economy will just be warehousing people, but it’s getting close to that point.
Canada Should Expect A Recession, But No Rate Cuts… Yet
Stat Can is forecasting Q1 numbers will show a 0.6% increase compared to the prior month. It seems a little lofty, but in the event it does—the good news is expected to pass quickly.
“Economic growth continued in February, albeit barely, but we think the Q1 rebound in GDP will prove fleeting and expect a recession will get underway in Q2 that will last through the remainder of 2023,” said Tony Stillo, Director of Canada Economics at Oxford Economics.
Stillo says the Bank of Canada (BoC) made the right call with a rate pause. The economic slowdown is in line with the central bank’s latest forecast. Elevated inflation, a tight labor market, and high wage growth are reasons he doubts we’ll see a rate cut anytime soon.
RBC was in agreement this morning. “With GDP growth tracking weak momentum into Q2, the BoC isn’t expected to hike interest rates again. Although inflation is also still too firm to justify a quick shift to cuts, even with the economy showing signs of softening,” said Janzen.