The Canadian economy and inflation outlook
Governing Council members turned their attention to the domestic economy. After weakness in the second half of 2023, GDP growth resumed in the first quarter of 2024. Recent data suggested positive but subdued GDP growth in the second quarter, largely driven by population growth. However, on a per-person basis, GDP appeared to have contracted. The economy clearly remained in excess supply, and there was room for economic growth to pick up without renewing inflationary pressures.
With population growth expected to ease, potential output growth would start to moderate in the second half of 2024. At the same time, GDP growth was forecast to increase, driven by exports and household spending. Members agreed that uncertainty about population growth was contributing to uncertainty about the economic outlook. Net flows of non-permanent residents (NPRs) had been revised up significantly from the April Report. NPRs as a share of the population was expected to rise in the near term before government policies to reduce this inflow take effect, but the timing and extent of reductions in net inflows was uncertain.
Members discussed various elements of the economic outlook.
Regarding consumption, rapid population growth had supported spending on necessities, whereas soft per-person spending had shown up in weak spending on discretionary items. Members discussed survey results that showed business expectations for future consumer demand were weak. Also, consumers continued to indicate caution in their spending and employment prospects. Still, members expected consumer spending to strengthen in 2025 even as population growth slowed. However, this outlook was clouded by differences among segments of the Canadian population. For instance, the impact on mortgage holders will depend on whether they have already faced changes in their mortgage rates. Some households could see income gains from interest-bearing savings, and some households could increase spending on interest-sensitive items as borrowing costs decline.
Members then discussed the housing market. Housing resale activity had been slower than expected, and new home construction had been weak as builders cited elevated costs, among other factors. Although residential investment was projected to increase substantially over 2025, members agreed that the imbalance between demand and supply was likely to persist for some time. This was expected to be particularly acute in urban rental markets where newcomers to Canada tend to settle.
Members spent considerable time discussing dynamics in the labour market. As the economy slowed, the unemployment rate had gradually risen to 6.4% in June. Several indicators showed that labour market slack had emerged:
- While prime-age workers had seen limited impact on their job prospects, it had become harder for new entrants to the labour force—young workers and newcomers to Canada—to find work.
- Job vacancies had come down to around their historical average and the job finding rate had declined.
- The Canadian Survey of Consumer Expectations indicated increased pessimism about job prospects. In particular, respondents believed the probability of losing their jobs had gone up.
- Respondents to the Business Outlook Survey from all sectors and regions reported that the labour market had continued to ease. The number of firms citing labour shortages was near survey lows.
Members agreed that slack in the labour market was expected to persist as labour force growth would continue to outpace employment growth in the near term.
Recent measures of wage growth had been volatile and were sending mixed signals. Overall, wage growth remained elevated at around 4%, well above productivity growth. According to the Labour Force Survey, wage growth in the public sector had picked up while it had been easing in the private sector. Members interpreted this difference as evidence that public sector contracts had taken longer to catch up to the higher cost of living. Wage growth was expected to moderate given the presence of labour market slack and weak labour productivity.
GDP growth was expected to pick up in the second half of the year and continue expanding by around 2¼% over the next two years. This forecast is largely driven by renewed strength in residential investment and consumption, as well as a boost in exports. The Trans Mountain Expansion pipeline should facilitate more shipments of oil. Also, motor vehicle exports are expected to rebound after plant retooling.
Residential and business investment was forecast to expand due, in part, to easier financial conditions. Spending by all levels of government was expected to contribute importantly to growth over the projection. Excess supply was expected to be gradually absorbed over the projection horizon as GDP growth picks up and potential growth moderates, primarily due to slower population growth.
Governing Council members then discussed the outlook for inflation. Consumer price index (CPI) inflation had been within the 1% to 3% range since January. After edging up in May, it eased to 2.7% in June. The Bank’s preferred measures of core inflation had eased meaningfully since the April Report and had also now been within the inflation-control range for a few months. Members noted that inflation had become less broad-based across goods and services—the share of components growing above 3% was close to its historical average.
Shelter prices remained the largest contributor to overall inflation. Strong demand for housing and limited supply would continue to put upward pressure on rent. Mortgage interest costs had eased slightly from very high levels. Rent inflation had risen further to close to 9% in June. After being well below its historical average since the second half of last year, inflation in services excluding shelter also increased. This was largely because telecommunications prices were not falling by as much as they had been. Inflation in other services more clearly linked to labour costs has remained elevated.
Overall, members expected core inflation to ease gradually to about 2.5% in the second half of this year and then ease further in 2025. Because of base-year effects from gasoline and some durable goods, total CPI inflation was projected to fall below core in the second half of this year and then edge up to be above core in early 2025, as base-year effects fade. CPI inflation was expected to ease to the 2% target in the second half of 2025.
