WESTERN PRODUCER — Canadians should prepare for slow economic growth, continued high interest rates and an exchange rate close to today’s level through 2024, says Export Development Canada.
“I really want to emphasize that we’re not looking at a recession,” said Ross Prusakowski, director of EDC’s Economic and Political Intelligence Centre.
“But we are seeing a slower period of growth.”
Canada’s gross domestic product is expected to grow by 1.2 percent in 2023 and 1.4 percent in 2024, down from 3.4 percent in 2022.
That is reminiscent of GDP growth during the global economic meltdown of 2008, which was followed by a contraction of the economy in 2009.
Consumers have been using government stimulus money to continue spending on goods and services in the first half of 2023, despite high inflation rates.
But that money has dried up.
“There’s not a lot of extra oomph that is going to come from consumers this year,” he said during the EDC’s 2023 Summer Global Economic Outlook webinar.
Consumer spending accounts for about two-thirds of Canada’s GDP.
The economy won’t be getting much help from businesses either. Companies have been using cheap money to invest in their operations.
But their focus will shift to revenue and profits in today’s high-interest rate environment.
Governments are the third leg of the economy, but they have already spent a lot of their stimulus firepower during the COVID years and can no longer maintain that level of spending.
Most developed economies are experiencing the same malaise as Canada.
There is trouble with emerging economies as well. China has been one of the world’s main growth engines since 2008, using government stimulus programs and a strong export program to propel its economy.
But it is now moving away from that approach. Its new growth targets are the lowest in 20 years as it pivots to prioritizing consumer and domestic spending over exports.
Central banks around the world have been raising interest rates to rein in inflation.
The Bank of Canada’s overnight target rate has climbed from 0.25 percent to 4.75 percent through a series of rate hikes.
Prusakowski figures there are one to two more increases coming in Canada and the U.S. The problem is that it takes 18 to 24 months for a rate hike to take full effect, so the ripples will be felt for quite some time.
Some analysts think the rate will peak at around five percent and then immediately drop to about half of that amount.
Prusakowski isn’t in that camp.
“Central banks are going to take a long time and are going to be very cautious about (reducing) rates,” he said.
They don’t want the inflation rate to “pop” after finally getting it into the target range of about two percent.
“We’re probably going to see central banks be willing to build a bridge that is a mile too long rather than a foot too short,” he said.
EDC is forecasting a Bank of Canada annual average overnight target rate of 4.74 percent in 2023 and 3.99 percent in 2024, rates that haven’t been seen since 2001.
He doesn’t think the overnight rate will drop back down to that near-zero level soon because central banks like to have the ability to reduce rates to stimulate economic activity.
EDC is forecasting that the Canadian dollar will continue to trade at 74 U.S. cents in 2023 and 2024 because Canada’s fiscal policy is closely aligned with that of the United States.
The exchange rate will fluctuate if one country raises interest rates and the other does not follow suit, but it should stay in that range.
Labour shortages will continue to be a problem in developed countries as baby boomers retire and are replaced by a generation that does not want to work as much.
Zhenzhen Ye, country risk analyst with EDC, expects crude oil prices to rise during the third and fourth quarters of 2023 as demand exceeds supply of the commodity.
Russia’s exports of crude oil and related products continue to be curtailed by sanctions, while OPEC recently announced production cuts.
There is also a seasonal surge in demand that is about to take place.
“We are moving into the summer driving season,” she said.
But in 2024 she is forecasting that crude oil prices will ease “a little bit” because of the continuing transition to renewable energy supplies.