Deloitte Canada’s economic outlook report suggests that Canada is likely to avoid a recession despite challenges such as sticky inflation, rising business insolvencies, and increasing mortgage delinquencies. The Bank of Canada raised interest rates to combat breakneck inflation but is expected to start cutting rates in June. Canada’s economy is expected to remain “stuck in neutral” in 2024, with GDP growth around one per cent before increasing to 2.9 per cent in 2025. The recovery is contingent on interest rate cuts and the moderation of inflationary pressures.
Deloitte’s forecasts are based on assumptions such as robust GDP growth in the U.S., continued inflation softening, rate cuts from the Bank of Canada, and steady immigration supporting demand. Canada’s GDP rose 0.6 per cent in January and an estimated 0.4 per cent in February, but the economic recovery depends on interest rate cuts, which in turn rely on inflation continuing to moderate. High housing costs and wage pressures above inflation pose challenges, with businesses facing rising unit labour costs and difficulty containing inflation. Employment gains are expected to slow in 2024, and household spending may remain modest in the first half of the year.
Deloitte predicts that household spending will improve in 2025 as interest rates decrease, the economy picks up, and pent-up demand is unleashed. However, business investment is falling at a worrying pace, and elevated interest rates may hinder the recovery in this area. High rates are also weakening the economy and eroding business confidence, leading to delays in investment plans and a focus on maintenance rather than expansion. In contrast, the U.S. economy has remained stronger under interest rate hikes, but the Federal Reserve is expected to start cutting rates later in the year.
Despite the challenges, Deloitte remains cautiously optimistic about Canada’s economic outlook, suggesting that the country may begin recovering from its slump in the second half of the year. While inflation has cooled significantly, factors keeping it elevated are not likely to reverse in the near term. The report highlights the impact of high housing costs on Canadians, with mortgage renewals at higher rates and increased shelter costs for renters. With the labour market holding up well and employment gains expected to slow, the Canadian economy faces a period of uncertainty in the near term. Ultimately, the recovery will depend on interest rate cuts, inflation moderation, and a boost in consumer and business confidence.
