Our economy, and inflation, are slowing — but so far, we’re on track for the “soft landing” the Bank of Canada has been steering our economy toward.
In the span of less than a year, the base overnight lending rate went from 0.25% to 4.5%. All the while, as interest rates climbed in 2022, inflation continued at well above the levels we’ve grown accustomed to. In the later part of 2022, inflation finally began a decline and that’s continuing into 2023. As of April, inflation had dropped to 4.3%, the lowest it has been since August of 2021 and down from 5.2% the month before.
Meanwhile, economic growth (measured as Gross Domestic Product) at the start of the year was 0.6% but dropped to 0.1% by February.
The Canadian Chamber of Commerce Business Data Labs breaks down the current economic movers and shakers:
• Output grew in 12 of 20 sectors. Both services and goods sectors were up by 0.1%, while goods sectors have had a tougher time since last fall.
• Professional services (+0.6% monthly growth) continue to lead the economy.
• The resilience in construction (+0.3%, up for a second straight month) is impressive, given the large increase in interest rates over the past year. Perhaps pricing in Canada’s housing market has already hit bottom, given on-going supply challenges and strong demand expected from large increases in immigration in recent months.
• The public sector grew by 0.2% and has grown for 13 months in a row. The federal public servant strike will be a drag on output starting in April.
• Wholesale (-1.3%) and retail trade (-0.5%) were weak, dragged down by auto and gas station sales.
What does this mean for local businesses?
Higher cost of living (inflation) and debt servicing (interest rate hikes) led to reduced consumer spending for many people, but is back on the upswing. According to RBC, discretionary spending jumped in April, including a 1.3% jump in restaurant spending.
While the current economic challenges have some echoes of 2008, there are some big differences — most notably the fact that people are still working. According to Statistics Canada, the number of job vacancies in Canada decreased to 855,890 in the fourth quarter of 2022, down from 987,700 in the third quarter. Less people are hiring, but we still have far more job openings than people to fill them.
The Statistics Canada Labour Force Survey for April paints a more positive view on our current economy as our unemployment rate continues to hover at 5%, employment increased by 33,000 (0.4%) in Ontario and wages are up 5.2% year-over-year.
In the grand scheme of things, most Canadians who are willing and able to work are still employed and making more money than they did last year. Where many economic slowdowns result in hikes in unemployment, the decrease in hiring is only narrowing a significant gap between demand for labour and its availability.
That’s not to say our local economy won’t feel the pinch of a slowing economy. Households and businesses carrying more debt have been hit harder by the rise in interest rates. Wage numbers are an average and not everyone has experienced pay increases that keep up with the increased cost of living. And some business sectors are facing more economic hardships than others.
Considering the fact that we just came through a devastating public health crisis followed by runaway inflation not seen in a generation, which has led to governments around the world trying to slow our economy without crashing it, we are well positioned for a “soft landing.” Consumer discretionary spending is trending back up, interest rates have stabilized, and we have a strong workforce.
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