Experts Warn: Canada's Economic Growth Slows as Recession Risks Rise

Is the Canadian economy already in a recession? This question is becoming increasingly difficult to avoid. Macroeconomic data continues to weaken, and the judgments from markets and rating agencies (Rosenberg Research and Fitch Ratings) are converging: Canada’s economy is experiencing a structural slowdown, characterized by weak domestic demand and sluggish growth.

Economist David Rosenberg, in a recent report, described the current Canadian economy as being “on life support.” Although the Bank of Canada has begun lowering interest rates, the economic fundamentals have not seen substantial improvement. The report notes that while a 1% annualized GDP growth rate may not look like a recession on paper, per-capita GDP is actually continuing to decline when accounting for population growth. This means that the average economic output and living standards of residents are effectively in regression.

Rosenberg provided several key judgments on the current state of Canada’s economy:

• Inflation is no longer the core issue: Rosenberg believes inflation has returned to the central bank’s comfort zone. The focus should now be on economic growth rather than lingering concerns over inflation.

• Rate cuts are not enough: Rosenberg predicts the Bank of Canada will be forced to cut rates further, with the policy rate potentially needing to fall below 2.25% to truly stimulate the economy.

• Currency pressure: Due to the bleak economic outlook, the Canadian dollar faces downward pressure. Compared to other commodity currencies like the Australian and New Zealand dollars, the CAD has fallen by more than 4%.

Of particular note is that interest rate cuts have not ignited the real estate market as expected. Rosenberg pointed out that residential construction spending has barely budged, and national home prices have remained flat or declined for 10 consecutive months. Meanwhile, the manufacturing sector has also performed poorly, declining by approximately 5% year-over-year. Retail sales, after adjusting for inflation, have shown almost no real growth.

At the same time, Fitch Ratings expressed similar concerns. In its latest report, Fitch lowered its forecast for Canada’s economic growth this year from an original estimate of 1.6% to 1.1%.

Core viewpoints from the Fitch report include:

• Weak domestic demand: Consumer spending is expected to grow by only 0.9% this year. Due to uncertainty in trade policies, businesses remain cautious about investment and hiring.

• The truth about unemployment: Fitch noted that while the unemployment rate appears to have peaked, this is primarily due to a decline in immigration reducing labor supply, rather than a recovery in labor demand. In fact, the potential labor supply exceeds existing job demand by about 1 million people.

• High leverage pressure: Despite the central bank’s rate cuts, borrowing costs for many households remain significantly higher than pre-pandemic levels, severely squeezing consumer spending power.

• External risks: The upcoming CUSMA (Canada-United States-Mexico Agreement) review is seen as one of the biggest uncertainties this year.

Rosenberg concluded: “While the Bank of Canada has done a lot, they haven’t done enough.” Markets generally expect that if economic data continues to soften, the central bank will have to take more aggressive rate-cutting measures to prevent the economy from falling into a deeper recession.