Posthaste: Canada may just pull off that elusive ‘soft landing’ — except for this province

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Central bankers and economists have been talking about the elusive “soft landing” for some time, but a report out today suggests it might actually be achievable.

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That’s the call of Deloitte Canada’s spring economic outlook.

“Despite the challenge of high debt loads in an elevated interest rate environment, the Canadian economy looks set to achieve the somewhat elusive soft landing, one where it avoids a recession while inflation returns to target,” said the report.

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The reasons behind the forecast by chief economist Dawn Desjardins and her team include the strong economy to the south of us, cooling inflation, interest rate cuts by the Bank of Canada expected to start in June and a still steady flow of newcomers to support domestic demand.

On Thursday, Statistics Canada reported that Canada’s economy showed stronger than expected growth in the first two months of this year.

Real gross domestic product (GDP) grew 0.6 per cent in January, beating analysts’ expectations of 0.4 per cent. The agency also expects a 0.4 per cent rise in GDP during February.

“Overall, it seems the economic slump we’ve found ourselves in for much of the past year is slowly coming to an end — and we can look forward to better economic conditions by the second half of 2024,” said Deloitte.

We still have to get through the first half, mind.

“Worrisome trends” persist as consumers continue to struggle with persistent inflation and higher interest rates, said Deloitte. According to Statistics Canada, at the end of 2023 debt payments were consuming 15 per cent of household incomes after mortgage rates nearly doubled from the start of 2022.

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Equifax Canada also reports an increase in missed mortgage and credit payments, with mortgage delinquency rates rising 135 per cent in Ontario and 62 per cent in British Columbia.

These pressures will continue as more homeowners renew their mortgages at higher rates, said Deloitte.

Businesses are also feeling the strain. Insolvencies were up almost 130 per cent in January from the year before and investment intentions have decelerated sharply.

“Against this backdrop, we remain cautious about the near-term outlook. But based on its current trajectory, Canada appears likely to skirt a recession and even seems poised to begin recovering from its current slump in the second half of this year,” said the report.

One region, however, did not avoid a recession. Newfoundland and Labrador was the only Canadian province whose economy contracted last year, with GDP dipping 0.5 per cent into the red. But Deloitte says the outlook improves this year and next.

The resumption of production at the Terra Nova oil field at the end of 2023 and the expected return of the SeaRose floating vessel in the third quarter of this year will boost the province’s oil output and the nascent green hydrogen industry should also support growth. Deloitte predicts this province’s GDP will grow 1.2 per cent this year and 2.3 per cent in the next.

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Prince Edward Island is the leader on Deloitte’s growth outlook chart, with its GDP estimated to grow by 2.1 per cent in 2024, the highest by far of all the provinces.

The steady flow of immigrants into PEI is expected to ease labour shortages and lower interest rates later this year should support growth in the island’s tourism and construction industries, setting the economy up to grow 2.8 per cent in 2025.

Alberta topped growth last year at 2.1 per cent and its economy is still doing well, said Deloitte. But there is weakness on the investment front as construction of the Trans Mountain pipeline extension wraps up. The province is one of the few in Canada that is forecast by Statistics Canada to see a decline in investment spending this year.

Saskatchewan, meanwhile, is a rising star with the potash industry attracting investment into the province. Combined with population gains and lower household debt, the economy is expected to grow 1.4 per cent this year and 3.1 per cent next. However, Deloitte cautions that Saskatchewan’s economy is sensitive to the volatility of commodity prices and weaker prices for potash, uranium and oil and the potential for another hot, dry growing season are risks.

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With households the second-most indebted in Canada next to British Columbia, Ontario has felt the full force of interest rates hikes and the outlook for 2024 looks weak, said Deloitte. But new investment in the electric vehicle battery industry should help growth accelerate to 3 per cent by next year.

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Canada’s economy took a page from the United States’ handbook to start the year and delivered growth that beat expectations.

Real gross domestic product edged up by 0.6 per cent in January, Statistics Canada reported Thursday, beating analysts’ expectations of 0.4 per cent. The agency also expects a 0.4 per cent rise in GDP during February.

“To put that two-month flurry of growth into perspective, the combined one per cent gain is as much as the economy grew in the entire 12 months of 2023,” Bank of Montreal chief economist Douglas Porter said in a note.

So where does this leave the Bank of Canada? Bloomberg says the numbers put GDP on track for a 3.5 per cent annualized increase in the first quarter, well above the central bank’s forecast of 0.5 per cent.

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That might cause a little anxiety on the inflation fighting front, but many economists still believe the Bank will make its first rate cut in June.

Porter says “important releases” such as the Bank’s own Business Outlook Survey today and then February trade and job numbers later this week should help clarify whether the growth spurt was “simply a seasonal illusion.”

“At this point, we are clinging to our call of four rate cuts, beginning at the June meeting,” said Porter. “But suffice it to say that if next week’s data echoes the robust GDP results, the main message in the April 10 decision and MPR may well be “what’s the rush?”

• Bank of Canada releases its Business Outlook Survey and Canadian Survey of Consumer Expectations
• Real estate boards across the country report home sales for March this week. Calgary is expected to kick off the reports today, following by boards for Vancouver and Toronto by mid-week.
• Today’s Data: United States ISM manufacturing and construction spending

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The foundation of diversification is simple: don’t put all your eggs in one basket. This tends to reduce risk and smooth out returns, but portfolio manager Robert Gill points out it can lower returns and be hard to manage. Find out more from FP Investing

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McLister on Mortgages

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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