Canada’s economic growth prospects are facing headwinds due to a combination of factors, including the high cost of borrowing, a housing crisis, elevated inflation, diminishing business confidence, weakened external demand, political turmoil in the context of deteriorating relations with India, and a drop in the popularity of Prime Minister Justin Trudeau. Against this backdrop, the real GDP growth rate of Canada is set to decrease from 3.7% in 2022 to 1.4% in 2023 to a further 0.9% in 2024, forecasts GlobalData, a leading data and analytics company.

GlobalData’s recent “Macroeconomic Outlook Report: Canada” highlights a shift in the inflation rate, which is projected to drop from 6.8% in 2022 to 3.7% in 2023 but stay above the Central Bank of Canada’s 2% target range. Food inflation is expected to decrease from 9.5% in 2022 to 4.7% in 2023. Since the beginning of 2022, the Central Bank of Canada has increased its policy rate 10 times, totalling a 475-basis point hike, in efforts to control inflation.

Despite Canada experiencing a two-year low in inflation rates in June 2023, there has been a recent resurgence. By August 2023, it had climbed to 4%, bouncing back from a low of 2.8% in June. On the other side, employment has shown strong growth, with the addition of 60,000 new jobs in September 2023. Additionally, the wages of permanent employees have risen by 5.3% annually as of September 2023. This situation has created an opportunity for the Central Bank of Canada to consider further interest rate hikes.

Meanwhile, Canada is facing an acute housing crisis, as indicated by historically low vacancy rates of 1% or lower in major cities Toronto, Vancouver, and Montreal. To address the economic issues like inflation and the housing crisis, a cabinet reshuffle was carried out by the Canadian government in July 2023. The government is also exploring a unique approach to tackle the housing affordability crisis by considering a cap on the admission of international students.

Puja Tiwari, Economic Research Analyst at GlobalData, comments: “The deteriorating Canada-India relationship carries significant economic implications. Traditionally focused on economic cooperation, development partnerships, and people-to-people ties, merchandise trade between the two nations amounted to $10.5 billion in 2022, compared to $4.1 billion in 2010. However, political turmoil and the halt in trade talks in September 2023 are set to impact the trade prospects, potentially hindering Canada’s access to the Indian market, disrupting exports, and straining economic partnerships. These challenges compound Canada’s existing economic difficulties.”

Sector wise, according to GlobalData estimates, mining, manufacturing and utilities contributed 17.7% towards GVA, followed by wholesale, retail, and hotels activities (12.6%), and construction (7.7%) in 2022. The three sectors are forecast to grow by 3.5%, 5.2%, and 4.1%, respectively, in 2023, compared to 10.1%, 12.4% and 15.0% in the previous year.

The “Investing in Canada Infrastructure Program,” with over $33 billion in funding to be spent by 2025, supports public projects nationwide, bolstering municipalities, provinces, and territories, and is expected to boost the construction and allied sector growth. GlobalData forecasts the construction sector GVA to grow by an average annual rate of 4.8% from 2023 to 2025.

Canada is a major global producer of minerals, including potash, uranium, platinum, aluminum, gold, and copper. In 2022, it became the world’s fourth-largest gold producer, with an 11% increase in output. Despite a recent decrease in copper production, Canada aims to reverse the trend with a 3.0% positive CAGR from 2022 to 2026, according to GlobalData.

The country also holds substantial oil and natural gas reserves, with its oil sands playing a crucial role in global liquid fuel supply. In February 2023, Equinor received a license from the Canadian regulator C-NLOPB for the Cappahayden K-67 oil discovery in Newfoundland’s Flemish Pass Basin. This discovery, estimated to hold approximately 385 million barrels of recoverable oil, is poised to enhance Canada’s oil reserves, and contribute to increased oil production in the country.

Canada is categorized as one of the very low-risk nations and ranked 18th out of 153 nations in GlobalData Country Risk Index (GCRI Q2 2023). The country’s risk score on various parameters, namely macroeconomic, demographic and social structure, technology, and infrastructure was higher than the North American average in Q2 2023.

Tiwari concludes: “To offset the repercussions of political and economic challenges, the Canada must focus on ensuring political stability, bolstering investor trust, and implementing tailored fiscal policies that foster growth, innovation, and employment creation. These measures are vital for building a resilient and prosperous future.”