Current conditions

Economic growth in Canada has picked up but remains weak on a per-person basis. Inflation in Canada has been below 3% since January, and measures of core inflation have also declined.

Capacity pressures have eased, and slack has opened up across certain segments of the labour market. There is more excess supply in the economy.

Broad inflationary pressures are easing. The share of prices rising more than 3% is now close to its historical average. But price pressures remain in shelter and some services excluding shelter.

Recent developments

After having stalled in the second half of 2023, gross domestic product (GDP) expanded in the first quarter of 2024. This was driven by strong population growth (See Table 1 in the Projections section).

However, on a per-person basis, GDP contracted for the fourth consecutive quarter due to ongoing weak household spending.

GDP is on track to expand by 1½% in the second quarter of 2024 (Chart 2).

With Canada’s population is growing at about 3%, this implies GDP per person is expected to contract by about 1½%, similar to its pace in the first quarter of the year.

Consumption per person remains weak

The decline in GDP per person is mainly due to a significant reduction in consumption per person because:

• demand for both motor vehicles and travel abroad is slowing as pandemic-related pent-up demand fades (Chart 3)
• households are allocating a larger share of their income to servicing debt payments, leaving less to spend on discretionary items such as meals at restaurants and clothing and footwear

Residential investment has fallen

Residential investment also looks to be weak, falling 2½% in the quarter. This reflects a slow spring resale market and weaker renovation spending mainly due to still-high interest rates.

In contrast, growth in government spending is projected to pick up. Business investment growth is on track to expand by 3½%, largely due to strong oil and gas drilling activity.

Capacity pressures

The Canadian economy has moved from excess demand in 2022 to excess supply. In the second quarter of 2024, the output gap is estimated to be between -0.75% and -1.75%.

Businesses’ reported capacity constraints have also fallen from their 2022 peak (Chart 4).

Labour market has cooled

After a period of being overheated, the labour market has cooled significantly. Much of the easing has occurred through a fall in job vacancies, which are now near their historical average, and a much lower job finding rate (Chart 5). The unemployment rate has climbed from a low of about 5% in 2022 to 6.4% in June 2024, with youth and newcomers particularly impacted (see In focus: How newcomers impact the Canadian economy).

The unemployment rates for newcomers and youth have risen to 11.6% and 13.5%, respectively, from lows of 6.9% and 9.3% in 2022. Given the greater challenges in finding work, the participation rate for youth has fallen. In contrast, the increase in the unemployment rate for prime-age workers has been more muted, rising from 3.9% to 5.3% over the same period. Overall, the labour market has moved into excess supply.

Various measures of wage growth are sending mixed signals, and there are some signs of moderation (Chart 6). Nonetheless, wage growth remains elevated relative to productivity growth.

With the job vacancy rate now back to normal levels, further weakness in employment growth is likely to show up in higher unemployment rather than lower job vacancies.

Inflation

CPI inflation has come down from 3.4% in December to 2.7% in June (Figure 1). The easing reflects diverging developments in goods and services inflation.

Goods inflation has fallen from 2.4% to 0.3%, while services inflation has increased from 4.3% to 4.8%.

Inflation is becoming less broad-based

The share of goods prices rising by more than 3% is now at 26%, below its historical average of 28%. In contrast, the share of services prices rising by more than 3% is 47%, higher than its historical average of 35% (Chart 7).

The decline in goods price inflation has been in non-energy goods. It reflects a fall in costs—such as import prices and past shipping costs—as well as slowing domestic demand. Elevated services price inflation reflects developments in both shelter price inflation and inflation in services excluding shelter (see In focus: Drivers of inflation in core goods and services).

Shelter price inflation remains elevated

Shelter services price inflation is around 7%, near its level in December 2023 and well above its historical average. Rent inflation has risen from just below 8% to close to 9%. The pressure on rental prices has been amplified by strong population growth in the context of structural supply constraints. Inflation in mortgage interest costs remains very high but has eased somewhat since the beginning of 2024.

Inflation in services prices excluding shelter rose to 2.9% in June 2024, close to its historical average, after having been below 2% for most of the year. The pickup is due to slower price declines across a few components, particularly communications. This has more than offset the easing of inflation in other components, such as food services.

Core inflation has eased

Measures of core inflation were around 2¾% in June 2024, down from about 3.5% at the end 2023.

Near-term inflation expectations have generally been falling but remain elevated relative to historical levels (Chart 8). Household inflation expectations fell sharply in the second quarter after having stalled for close to one year. Businesses’ pricing behaviour has largely returned to normal.