By mid-2022, the Canadian economy had returned to or exceeded the pre-pandemic levels for most major economic indicators.
In Q2 2023, TD Economics (TDE) anticipates inflationary pressures in Canada will increase and lead to higher interest rates than expected in the previous quarter. Consequently, the Bank of Canada increased the overnight rate at from 4.50% to 4.75% during Q2. Inflation and heightened interest rates are likely to continue as the Bank of Canada enters a testing stage of adjusting the policy rate. TD Economics forecasts a 1.1% increase in real GDP for Canada in Q2.
Recent data indicates that consumer spending has decreased by a 5.0% annualized rate over the prior quarter. British Columbians face the highest average debt burdens in the country and TDE notes that increased lending rates have contributed to decreased spending. TDE also attributes decreased quarter-over-quarter job growth to the decrease in household spending. TDE expects the increase in government spending budgeted for 2023 of 8.0% (the highest among all provinces and territories) to offset this decrease in spending, and forecast a 1.2% increase in real GDP growth for 2023, which is above TDE’s forecast of 0.6% for 2023.
This post provides an update from Q1 2023 to Q2 2023 for selected economic indicators. The indicators discussed herein are both indicative and representative of the Canadian, BC, and regional economies.
Labour Market
The labour force refers to the supply (employees) and demand (employers) for labour. The number of labour force participants and the unemployment rate are indicators that highlight the material changes that took place in the labour market from Q1 2023 to Q2 2023.
COVID-19 Government Programs
The federal government initiated several programs to support employers and employees impacted by COVID-19. Currently, these COVID-19 specific programs are no longer in effect; however, the Jobs and Growth Fund no longer has COVID-19 stipulations but is available to support regional job creation in companies that meet the criteria, such as supporting the adoption of clean technology, sustainable economic growth, underrepresented groups, or the adoption of digital solutions.
National
Before the impact of COVID-19, Canada experienced a steady increase in labour force participants. As of June 2023, the Canadian labour force comprised of 21.6 million people. This level is an increase of approximately 665,000 participants since the prior quarter and above the pre-COVID level of 20.0 million.
The national unemployment rate was 5.2% throughout Q2; however, TDE expects Canada’s unemployment rate to increase gradually over both the short and long run.
BC
During Q2, BC’s unemployment rate increased from 5.1% to 5.4%, which is above the Province’s pre-COVID rate of 5.0%. TDE forecasts BC’s average unemployment rate for 2023 at 5.0%, which is slightly below their Q1 forecast of 5.1%.
Regional
The unemployment rate for Vancouver Island and Coast regions increased during Q2 from 4.1% to 4.4%, 0.9% lower than pre-pandemic rates. In Victoria, the unemployment rate fluctuated throughout the quarter but ended at 3.6%, trending above its pre-pandemic unemployment rate of 3.5%.
Gross Domestic Product (GDP)
National
TDE forecasts Canada’s real GDP in 2023 to grow by 1.6% which is above their Q1 forecast of 0.8%. This growth is attributed to increased employment in the quarter. TDE attributes the relatively flat growth forecast to a draw-down in Canadian business inventories and a widening wedge between resilient consumer spending and reduced corporate spending.
BC
TDE also forecast increased growth for the BC economy of 1.2% for 2023, slightly above their 2023 Q1 forecast of 0.6% growth. TDE attributes the brighter forecast to increased government spending offsetting a decreasing trend in consumer spending and employment.
The resulting forecast for BC’s GDP is $274.0 billion for 2023, $3.25 billion higher than 2022 and $18.8 billion above 2019’s pre-pandemic levels.
Housing Market
BC
Housing starts and average residential prices reflect market indicators with a strong correlation to both the construction and real estate industries. BC’s housing starts decreased by 1.9% during 2022. The BC Real Estate Association (BCREA) forecasts a decrease in housing starts of 18.6% for 2023, followed by another decrease of 2.6% for 2024, due mainly to the impact of recent interest rate increases.
BCREA forecasts a decrease of (6.1)% in the BC average MLS® price for single-family dwellings for 2023, which results in an average price of $935,500 for the year. BCREA’s Q2 forecast is higher than their Q1 forecast for 2023 of a decrease of (7.1)%. BCREA forecast an increase of 2.3 % in the MLS® price for 2024, resulting in an average price of $957,100.
Regional
BCREA forecasts a decrease in average MLS® prices for single-family dwellings on Vancouver Island of (12.1)% for 2023, with an increase of 3.7% predicted for 2024. In Victoria, BCREA forecasts a decrease in the average MLS® prices for single-family dwellings of 6.7% for 2023, and an increase of 1.6% predicted for 2024.
Interest Rates & Foreign Exchange
During Q2 2023, the Bank of Canada (BoC), has increased the overnight target rate to 4.75% at the end of Q2 and the average for the quarter is forecast at 4.57%. TDE predicts that the rate will increase to 5.00% throughout the remainder of 2023 to an annual forecast of 4.80% before decreasing to 4.25% for 2024 and decreasing again to 2.25% for 2025.
The rising overnight target rate resulted in an increase in the prime rate. The average prime rate for Q2 was 6.8%, which is an increase of 0.07% from the prior quarter. The prime rate will likely plateau in alignment with the target overnight rate.
The BoC has stated that it will continue to increase policy rates to return the inflation rate to the long-term target of 2.00% from its recent high of 6.80% for 2022. Naturally, there is expected to be some lag in the process, and TDE forecasts inflation to be 3.80% for 2023 before decreasing to 2.70% for 2024, and 2.10% for 2025. The BoC attributes Canada’s inflation increases to strong demand for services and a tight labour market.
TDE forecasts the average annual USD to CAD exchange rate at $0.74 for 2023 and 2024. This exchange rate tends to correlate to oil prices, and over the long-term the value of the Canadian dollar relative to the US dollar typically fluctuates in-step with oil price changes.
Crude Oil Prices
Canada has the third largest proven oil reserves in the world. As a net oil exporter, the Canadian economy is heavily affected by the price of crude oil, with the greatest impact felt in Canada’s major oil-producing provinces. The majority of Canadian crude oil production is in Alberta (81.0%), Saskatchewan (10.0%), and Newfoundland and Labrador (6.0%).
In North America, the West Texas Intermediate (WTI) crude oil spot price is the benchmark oil price. Historical WTI crude oil daily spot prices at the end of Q2 were:
Over the course of Q2, WTI oil prices decreased from $83.26 on April 12, 2023 to $67.08 on June 12, 2023, before finishing the quarter at $70.66 on June 30, 2023. The International Energy Agency (IEA) attributes the decrease to rising crude oil stocks and a weak economic environment that continued from the prior quarter. TDE forecasts the WTI crude oil price to average $78.00 per barrel for 2023 and $80.00 for 2024.
Capital Markets
The international response to COVID-19 at the beginning of March 2020 negatively impacted the current and anticipated operations of privately-owned and publicly traded North American businesses. The Dow Jones Industrial Average (DJIA) and S&P/TSX Composite Index witnessed the greatest single-day percentage drop since the stock market crashes of 1943 and 1987, respectively.
By the start of 2021, both indices had recovered to their pre-COVID-19 levels and in the first quarter of 2022, both indices reached all-time highs. In Q2 2023, the DJIA index ranged from $32,764.65 USD (May 25, 2023) to $34,408.06 USD (June 15, 2023). The S&P/TSX ranged from $19,418.20 CAD (June 23, 2023) to $20,693.20 CAD (April 21, 2023).
The quarter-over-quarter change was 3.8% for the DJIA index and 4.0 for the S&P/TSX index. It is important to note that these indicators are based on forward-looking assumptions and analysis.
Moving into the third quarter of 2023, TDE forecasts inflation to decrease as interest rate hikes take hold and government policy continues to lower daycare costs and provide energy rebates in some provinces. The BoC expects to increase current interest rates into the next quarter to continue to combat inflation rates that remain above their target range. As a result, projected economic growth will continue slowing through 2023 in both the US and Canada before increasing for 2024. TDE forecasts that the consumer price index will decrease throughout 2023 reaching the target range of 1.0% to 3.0% by the end of the year.
Higher input prices and labour costs are expected to continue to stifle profit margins in multiple industries. Nevertheless, energy, commodity, and food-producing sectors could continue to benefit from higher prices. TDE expects interest rates hold steady, maintaining downward pressure on housing prices.