Bank says Canada struggles under the surface
Canada's economy might not be in a recession by the technical definition, but it certainly feels like one for many Canadians, according to the Royal Bank of Canada (RBC).
Although the nation has avoided outright declines in gross domestic product (GDP) due to rapid population growth, per capita output is falling and unemployment rates are rising at levels usually seen during economic downturns.
Is it a recession, or not?
Surging population growth has prevented a technical recession, according to a recent analysis by the bank.
Since mid-2022, Canada has added 2.1 million new residents, driving a 6% population increase from Q2 2022 to Q1 2023. This influx has helped sustain overall economic growth, as new arrivals have bolstered consumer spending, which makes up more than half of GDP.
However, this growth has masked underlying weaknesses.
“Without higher population boosting demand, the Canadian economy almost certainly would have contracted outright over last two years,” RBC noted.
Real per capita output has declined in six of the last seven quarters, and unemployment has risen concurrently.
The unemployment rate has increased by 1.6 percentage points from post-pandemic lows, a rise typically associated with recessions. As of June, layoffs had surged 20% from a year ago, and many students and new graduates are struggling to find jobs.
Role of interest rates
High interest rates and inflation have also eroded household purchasing power. "Higher interest rates alongside decades-high inflation in 2022-23 ate away at household purchasing power," RBC reported.
Per person, after-inflation household spending is 2.6% below its post-pandemic peak and 2% lower than in 2019.
RBC predicted that interest rate cuts from the Bank of Canada will eventually alleviate some pressure on households.
"The BoC's easing cycle is underway after an initial 25 basis point interest rate cut in June. We expect three additional back-to-back cuts in subsequent meetings will bring the overnight rate to 4% by year end," the report stated.
Read next: What do latest Canada and US inflation trends mean for interest rates?
While these rate cuts will help, mortgage renewals in 2025-26 will still pose challenges, though they should be manageable if the labour market does not deteriorate further. Households with variable-rate mortgages and credit market debt will feel some relief as interest rates drop.
The bank said real per capita GDP will likely remain negative through the end of this year but turn positive in the second half of 2025 as the effects of elevated interest rates continue to fade.
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