Canadian businesses face a slew of downside risks as the economy continues to slow in 2024, with the labour market, higher interest rates, and a weak global environment posing significant challenges.
Dominique Lapointe (pictured), director of macro strategy at Manulife Investment Management, shared a sobering outlook on Canada’s economy, noting that recovery will hinge on central bank easing at the mid-year point.
“We saw some in 2023 and that slowdown will continue,” Lapointe said. “In the labour market, there might be more signs of reduced hours in certain industries, maybe some layoffs in others.”
In his 2024 forecast, Lapointe noted that Canada’s level of economic activity has not increased since May of last year and has declined almost continuously since September 2022 on a per capita basis.
Eight out of 20 industries contracted in October 2023 on a year-over-year basis, with manufacturing and construction – industries sensitive to interest rates – leading the decline.
While elevated inflation and higher interest rates were the key macroeconomic factors that shaped 2023, Manulife Investment Management noted that Canadians’ job security and uncertainty over mortgage renewals will mark 2024.
Lapointe’s forecast also highlighted the following points:
Higher interest rates, coupled with high inflation, have led consumers to reduce their spending. Upcoming mortgage renewals will add pressure on Canadians to set aside more money, the report added.
“The downside risks are acute for Canada because of the way our economy relies on consumers, who have started to pull back,” Lapointe said.
On the labour front, while layoffs stayed at the normal rate, weaker demand for jobs could drive up the unemployment rate later in the year. The construction and financial services industries will be particularly vulnerable to layoffs.
“So far, we haven't seen any large increase in insolvencies; we've seen some across provinces, but it's not something alarming. But are we going to see more of that, and that snowball into certain localities and certain cities?” Lapointe said.
The fact that the United States, Canada’s largest trading partner, is also heading for a slowdown adds to the headwinds that Canadian businesses face at the start of the new year. But Lapointe stressed that the message is not to be alarmist but to present a clear picture so that businesses can plan ahead.
Despite the gloomy outlook, Lapointe also predicted a good chance for Canada’s economy to make a healthy rebound. The best-case scenario is that supply-side pressures driving inflation cool down and businesses overcome weakness in the labour market.
“I think conditions for inflation would have continued to move in the right direction [by mid-2024],” he told Insurance Business.
“Both the Fed and the Bank of Canada will look at these conditions and try to avoid a harder landing, so a deeper recession, and gradually, gradually ease their policy rate. So that means for businesses, easier financing conditions, you're going to be looking at some improvement on the global picture, especially for manufacturing.”
Lapointe added that he sees a “20% to 25% chance” of this scenario playing out.
“Things can snowball from there, where once you have the external picture improving, financing conditions are better, and then you can have a more sustainable rebound in the second half,” he said.
What are your thoughts on Canada’s economic outlook for 2024? Please share them in the comments.
