Canada’s Economy Had ‘Rare’ Economic Retraction in 2023 Despite Absence of Recession: Report

People cross the intersection at Spadina Ave and Dundas Street in Toronto on Aug. 17, 2023. Canada's GDP per capita contracted by 4.4 percent during the third quarter of 2023, says a report by National Bank Financial. The Canadian Press/Nathan Denette

Canada’s economy experienced an economic retraction in 2023 that is “extremely rare” outside a recession, while at the same time the country sustained record-breaking population growth, according to a report by National Bank Financial.

“Third-quarter GDP data came in below economists’ consensus expectations, showing outright contraction, notably due to a drop in private domestic demand,” said the report’s authors. “Consumption stagnated for the second quarter in a row, a stinging setback in the current demographic context characterized by record population increases.”

The report said Canada’s GDP per capita contracted by 4.4 percent during the third quarter of 2023, whereas the bank’s economists had previously estimated a 2.4 percent contraction. The authors also found that over the past year, company profits have fallen by 22.4 percent compared to workers’ compensation rising by 6.8 percent, which may lead to companies “facing difficult decisions that could result in a reduced appetite for hiring and, in some cases, job losses.”

Additionally, the report warned that hiring in the labour market is not keeping pace with Canada’s population growth, which has resulted in the unemployment rate climbing to 5.8 percent in November from just 5 percent in April. The only time this rise in unemployment was seen outside of a recession was when the tech bubble burst back in 2001.

There was also a drastic change in the factors that small- and medium-sized enterprises (SMEs) believe are hampering their ability to increase sales or production. While 22 percent of SMEs polled believed insufficient domestic demand was hampering their productivity in May 2022, a whopping 45.6 percent cited it as a reason in November 2023.

The report said that while the Bank of Canada’s recent interest rate hikes have increased mortgage interest costs for homeowners, the “staggering increase in population” has caused a rise in rental costs. Although Canada’s inflation rate is at 3.1 percent, the costs for shelter are growing at 6 percent annually.

In the first nine months of 2023, Canada had the fastest population growth in its history, with around one million newcomers arriving in the country. A Canada Mortgage and Housing Corporation report from June 2022 estimated that the current rates of home-building will leave Canada with a shortage of some 3,500,000 new homes by 2030, or around 440,000 homes a year.

Overall, the report’s authors anticipate a difficult beginning to 2024, as the economy has yet to fully digest the effect of the central bank’s interest rate hikes.

“We expect the Canadian economy to contract in the first half of the year, resulting in a decline of 0.2% for the year,” they wrote. “Progress on the inflation front should enable the Bank of Canada to cut rates by 175 basis points in 2024 to give some breathing space to a faltering economy.”