We expect below-trend growth in Canada for 2024 amid potent monetary policy transmission which should contribute to continued progress towards lowering core inflation to a range of 2.1% - 2.4% at year-end. 

The “last mile” of the inflation target, similar to the U.S., will be the hardest to conquer for the Bank of Canada, largely due to sticky services inflation. Given progress on the inflation fight and below-trend growth, we expect the BOC to cut its policy rate target by an additional 25-50 basis points this year, ending the year between 4.25% - 4.5%. We see unemployment in Canada hovering between 6.0% -6.5% throughout the year, as wage growth continues along a more moderate path.  

Inflation

A weaker labour market and a resulting easing of wage pressures should slow price increases for services unrelated to shelter. As figure 1 shows, since Q4 2023, core CPI has been on a downward trend even as price growth for services has been rising slowly. Prices for goods have risen 1% on a year-over-year basis as of May and faster price growth for services was fueled by travel tours, rent, cellular services and air transportation. Rents over the last 12 months rose by 8.9% largely due to population growth and higher interest rates.

The pace of CPI growth rose to 2.9%, year-over-year in May, up from a 2.7% gain in April. This dampened expectations for another 25-basis point reduction by the BOC in July. We foresee continued progress in the inflation fight amid below-trend growth and restrictive monetary policy. High mortgage interest costs should start to fall with further decreases in the BOC policy rate, as mortgage costs account for almost 20% of the average Canadian’s income, which is a record high. 

Figure 1

Source: Statistics Canada

Economic Growth

Canada’s GDP grew by 1.7% in Q1, driven by a rise in household spending, particularly on services. The household savings rate was 6.9%, the highest rate since the first quarter of 2022, as consumers delayed spending on goods in anticipation of possibly higher mortgage costs and rents. However, real GDP per capita, which accounts for Canada’s rapidly growing population, declined again during the quarter. It was the sixth decline in the last seven quarters. 

Canada’s economic growth remains below its pre-pandemic trend. Restrictive monetary policy intended to fight inflation constrained activity, leaving Canadian GDP growth well below potential. However, with the BOC having started a policy-easing cycle, we anticipate that the output gap could remain around 4% at year-end 2024, as you can see in Figure 2.

Figure 2

We expect below-trend growth for Canada in 2024, as consumers feel the impact of higher monetary policy. This is a significant factor for Canadian homeowners due to the greater use of variable rate-mortgages versus other regions which have longer-term fixed mortgage rates, like the U.S.

Monetary Policy

Given progress on the inflation fight and below-trend economic growth, The Bank of Canada (BOC) on June 5 became one of the first developed markets to central banks to cut rates, decreasing its overnight rate target by 25 basis points, to 4.75%. We expect the BOC to cut its policy rate target by an additional 25-50 basis points later this year.

Bank of Canada governor, Tiff Macklem, mentioned on June 24th that he will be “looking for wage growth to moderate further” but also suggested that the bank is focusing on certain measures of wage growth that have slowed more than the overall rate. He also mentioned that the economy appears on track for a soft landing, opening the path for further rate cuts. As inflation continues its progress, growth sustainability should become more important, particularly as mortgage renewals will take place against some of the lowest rates in history five years prior. That coupled with tighter immigration policy that could weigh on consumer growth. All these aspects make us optimistic about the likelihood of further rate cuts in 2024.

Labour Markets

Labor markets continue to loosen as the unemployment rate has steadily risen to 6.2% from the trough of 4.8% in July of 2022 and 5.7% in January. Job vacancies, which measure the number of open positions among Canadian employers, fell to a little over 575,000, which is 28% drop from April 2023. There are 2.3 people unemployed for each job vacancy.

After the April hiring surge, which was largely driven by increases in part-time and service sector workers, the labour market geared down in May. A labour market gain of 27,000 workers was driven entirely by 62,000 new part-time jobs as full-time employment declined by 36,000.

The unemployment rate is within our target range of 6.0% - 6.5%, and we expect it to hover around that range for the rest of the year. Wage growth has moderated to around 5% year over year but remains well above its pre-pandemic average of 2.25%.

Figure 3

Source: Canada Labour Force Survey, Statistics Canada

Publication date: July 2024

CFA® is a registered trademark owned by CFA Institute.

The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.

Certain statements contained in this material may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein. 

While the information contained in this material has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material. 

This material is not a recommendation, offer or solicitation to buy or sell any security, including any security of any investment fund or any other financial instrument. The information contained in this material is not investment advice and is not tailored to the needs or circumstances of any investor, nor does the information constitute business, financial, tax, legal, regulatory, accounting or any other advice.  

The information contained in this material may not be specific to the context of the Canadian capital markets and may contain data and analysis specific to non-Canadian markets and products.

The information contained in this material is for informational purposes only and should not be used as the basis of any investment recommendation.  Investors should consult a financial, tax and/or other professional advisor for information applicable to their specific situation.  

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its subsidiaries or affiliates, including Vanguard Investments Canada Inc.