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Economic Research: Economic Outlook Canada Q2 2023: A Dip Is Expected, Though Resilience Persists


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Economic Research: Financial Fragility For U.S. Households And Businesses Hits Its Highest Level Since The Global Financial Crisis


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Global Economic Outlook Q2 2023: Real Resilience Meets Financial Fragility

Economic Research: Economic Outlook Canada Q2 2023: A Dip Is Expected, Though Resilience Persists

The Canadian economy was surprisingly resilient in the first quarter of 2023 after a disappointing end to 2022. Helped by a mild winter and better economic conditions in the U.S. at the start of the new year, first-quarter economic data seems to be coming in better than we expected. We now expect a 0.4% annualized gain in real GDP for the first quarter (was down 0.9% in our November forecast).

However, some weakness is likely heading into the second quarter. S&P Global Ratings Economics expects Canadian economic activity to dip 0.6% in the second quarter on continued declines in housing, a slowdown in consumer spending, and weakening exports as the U.S. falls into recession. For the year, however, we expect a 0.8% increase in real GDP as Canada likely avoids recession.


Since our September forecast, we have expected the U.S. to fall into a shallow recession in 2023. We now expect U.S. GDP to decline by 0.3 percentage point between its peak in first-quarter 2023 and its third-quarter trough. If this prediction proves correct, this recession will beat the 2001 recession as the softest since 1960.

Although safeguards from the Federal Reserve and other regulators have stabilized conditions, banking concerns increase the risks of a worse outcome. We developed these forecasts during a period of high market volatility and significant policy changes, and they therefore have wider-than-normal confidence bands. Forecasting began before the failure of Silicon Valley Bank.

Canadian economic growth stalled in fourth-quarter 2022 for the first time since the pandemic-led contraction in second-quarter 2021. A slowdown in inventory accumulation and continued weakness in housing and business investment led to the flat GDP growth.

Despite rising interest rates, elevated inflation, and tighter financial conditions, output rebounded in January, according to Statistics Canada, which may bode well for the quarter. The Canadian economy likely grew by 0.3% in January, on the back of solid employment gains--supported by gains in professional services, mining, wholesale trade, and transportation, which offset weakness in construction and retail trade.

Our high-frequency real-time economic data indicated continued growth through mid-March, with indicators pointing to gradual improvement in operating conditions in recent weeks. The Consumer Confidence Index by Bloomberg and Nanos Research improved to 48.3 as of March 17--the second-highest reading in the past year--as inflationary pressure slowly subsided. Five-year and 10-year inflation expectations fell to 1.95% and 1.9% as of March 17, 2023, respectively. The drop in long-term inflation expectations indicates that interest rate hikes by the Bank of Canada and the drop in oil prices might be influencing household expectations for consumer prices.

Lumber prices have moved up close to 17% in the past three weeks, to $440 per 1,000 board feet on March 21 after dropping to $374 per 1,000 board feet on Feb. 22. However, they remain 74% below the historical peak on May 7, 2021, amid depressed housing activities.

Currently the housing market seems to have bottomed out, based on February housing starts and new home sales in Canada and the U.S. In Canada, housing starts increased 12% to 243,000 in February, following four consecutive monthly declines, while new home sales edged up 2.3% from January. Mortgage rates inched down to 5.8% on average in February after rising to 5.9% in December last year.

The recent financial turmoil stemming from U.S. bank failures adds downside risk to our forecasts, particularly for the U.S economy, with knock-on effects for the Canadian economy. However, these forecasts assume recent measures by regulators to stabilize the financial markets are successful. A rate cut by the Bank of Canada may be on the table sooner than expected if global financial concerns spread to the real economy, but this is not built into our March forecast. We expect the Bank of Canada's policy rate to hold at 4.5% until early 2024, when we expect it will start easing.

S&P Global Ratings Economic Outlook For Canada (Baseline)
2022 2023f
Q4 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2022 2023f 2024f 2025f 2026f
(% change)
Real GDP 6.9 2.7 3.2 2.8 0.1 0.4 (0.6) 1.4 1.6 (5.1) 5.0 3.5 0.8 1.5 1.8 2.0
GDP components (in real terms)
Domestic demand 7.4 5.1 9.4 (1.1) (3.8) 0.1 (0.4) 1.1 3.1 (5.6) 6.9 4.8 (0.0) 1.5 1.7 1.8
Consumer spending 1.5 2.2 9.3 (0.4) 2.7 5.2 0.5 1.6 3.0 (6.1) 5.0 4.9 2.8 2.0 2.2 2.1
Residential construction 11.7 8.8 (31.5) (18.6) (8.8) (15.8) (3.5) (0.1) 3.2 5.0 14.9 (11.0) (11.0) 1.5 1.1 1.1
Exports of goods and services 16.3 (7.6) 8.1 9.5 0.7 11.9 (2.9) 1.8 2.8 (8.8) 1.5 2.7 4.5 1.4 1.7 1.6
Imports of goods and services 20.3 0.2 29.5 (3.4) (12.1) 7.7 (1.9) 0.5 4.4 (9.1) 7.9 7.0 0.6 1.5 1.7 1.2
CPI 4.7 5.8 7.4 7.1 6.7 5.4 3.8 3.0 2.5 0.7 3.4 6.8 3.7 1.7 2.1 2.0
Core CPI 3.9 4.9 5.9 5.9 5.7 5.3 4.2 2.9 2.2 1.2 2.8 5.6 3.6 1.6 1.9 2.3
Nonfarm unit labor costs (1.3) 11.2 7.4 9.9 4.5 (2.7) 0.8 (1.8) (1.3) 3.5 4.0 7.2 1.6 0.3 2.4 1.6
Unemployment rate (%) 6.3 5.7 5.1 5.1 5.1 5.1 5.3 5.8 6.0 9.7 7.5 5.3 5.5 6.0 5.1 4.8
Bank of Canada policy rate (%) 0.3 0.5 1.5 3.3 4.3 4.4 4.5 4.5 4.5 0.3 0.3 4.3 4.5 3.5 2.3 2.3
10-year T-note yield (%) 1.6 1.9 2.8 3.3 3.3 3.2 3.5 3.5 3.4 0.7 1.4 2.8 3.4 3.1 2.8 2.7
Current account (bil. $) 4.9 1.1 (0.3) (7.7) (15.0) (16.2) (7.6) 3.9 6.2 (35.4) (5.4) (5.5) (3.5) 6.3 27.1 32.1
Saving rate (%) 3.8 6.1 2.4 5.0 6.0 4.1 4.3 4.1 3.7 11.5 8.4 4.9 4.1 3.5 4.0 4.2
Quarterly percentage change represents annualized growth rate; annual percentage change represents average annual growth rate from a year ago. Quarterly levels represent average during the quarter; annual levels represent average levels during the year. Quarterly levels of CPI and core CPI represent year-over-year growth rate during the quarter. Core CPI is consumer price index excluding energy and food components. CPI--Consumer price index. f--Forecast. Sources: Statistics Canada, S&P Global Market Intelligence, and S&P Global Ratings Economics estimates.

The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

North American Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
Research Contributors:Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai
Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Soumyadip Pal, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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