Monetary Policy Report—July 2024
Economic growth in Canada is forecast to improve in the second half of 2024 and strengthen further in 2025 and 2026. Core inflation is expected to ease gradually, while the path of CPI inflation will be bumpy.
Compare recent Bank projections
| 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|
| Consumption | 0.9 (0.9) | 1.1 (0.6) | 0.7 (0.8) | 1.4 (1.1) |
| Housing | -0.9 (-0.9) | 0.1 (0.4) | 0.5 (0.6) | 0.5 (0.5) |
| Government | 0.5 (0.5) | 0.6 (0.7) | 0.7 (0.7) | 0.4 (0.4) |
| Business fixed investment | -0.1 (-0.1) | -0.1 (0.0) | 0.4 (0.3) | 0.5 (0.2) |
| Subtotal: final domestic demand | 0.5 (0.5) | 1.7 (1.7) | 2.3 (2.4) | 2.8 (2.2) |
| Exports | 1.8 (1.9) | 0.6 (1.0) | 1.2 (1.1) | 0.7 (0.4) |
| Imports | -0.3 (-0.3) | -0.4 (-0.6) | -1.0 (-1.0) | -0.9 (-0.6) |
| Inventories | -0.8 (-1.0) | -0.7 (-0.6) | -0.4 (-0.3) | -0.2 (-0.1) |
| GDP | 1.2 (1.1) | 1.2 (1.5) | 2.1 (2.2) | 2.4 (1.9) |
| Memo items (percentage change): | ||||
| Range for potential output | 1.4–3.2 (1.4–3.2) | 2.1–2.8 (2.1–2.8) | 1.1–2.4 (1.1–2.4) | 0.9–2.2 (0.9–2.2) |
| Real gross domestic income (GDI) | -0.9 (-1.0) | 1.1 (1.4) | 0.7 (0.7) | 2.0 (1.6) |
| CPI inflation | 3.9 (3.9) | 2.6 (2.6) | 2.4 (2.2) | 2.0 (2.1) |
Find out more in the Outlook section.
| 2023 | 2024 | 2024 | 2025 | 2026 | ||||
|---|---|---|---|---|---|---|---|---|
| Q4 | Q1 | Q2 | Q3 | Q4 | Q4 | Q4 | ||
| CPI inflation (year-over-year percentage change) | 3.3 (3.3) |
2.8 (2.8) |
2.7 (2.9) |
2.3 | 2.4 (2.2) |
2.0 (2.1) |
2.0 (2.1) |
|
| Core inflation (year-over-year percentage change)† | 3.4 (3.5) |
3.1 (3.3) |
2.7 (3.0) |
2.5 | 2.4 | 2.0 | 2.0 | |
| Real GDP (year-over-year percentage change) | 1.0 (0.9) |
0.5 (1.0) |
0.7 (1.2) |
1.5 | 2.0 (2.1) |
2.1 (2.2) |
2.5 (1.9) |
|
| Real GDP (quarter-over-quarter percentage change at annual rates)‡ | 0.1 (1.0) |
1.7 (2.8) |
1.5 (1.5) |
2.8 | ||||
- * See details on the key inputs to the projection. Numbers in parentheses are from the projection in the previous Report.[←]
- † Core inflation is the average of CPI-trim and CPI-median.[←]
- ‡ Over the projection horizon, 2024Q2 and 2024Q3 are the only quarters for which some information about real GDP growth was available at the time the projection was conducted. For longer horizons, fourth-quarter-over-fourth-quarter percentage changes are presented. They show the Bank’s projected growth rates of CPI and real GDP within a given year. As such, they can differ from the growth rates of annual averages shown in Table 1.[←]
Sources: Statistics Canada and Bank of Canada calculations and projections
Read more in the Outlook section.
| Projected growth* (%) | |||||
|---|---|---|---|---|---|
| Share of real global GDP† (%) | 2023 | 2024 | 2025 | 2026 | |
| United States | 16 | 2.5 (2.5) |
2.3 (2.7) |
2.1 (1.8) |
2.2 (2.2) |
| Euro area | 12 | 0.6 (0.5) |
0.7 (0.4) |
1.3 (1.2) |
1.6 (1.7) |
| Japan | 4 | 1.8 (1.9) |
0.0 (0.8) |
1.1 (0.7) |
0.7 (0.5) |
| China | 18 | 5.2 (5.2) |
4.7 (4.7) |
4.3 (4.4) |
4.0 (3.9) |
| Oil-importing EMEs‡ | 34 | 3.9 (3.9) |
3.9 (3.5) |
3.8 (3.7) |
3.9 (4.0) |
| Rest of the world§ | 16 | 1.4 (1.2) |
1.8 (1.7) |
2.5 (2.7) |
2.5 (2.5) |
| World | 100 | 3.1 (3.1) |
2.9 (2.8) |
3.0 (3.0) |
3.0 (3.1) |
- * Numbers in parentheses are projections used in the previous Report.[←]
- † Shares of gross domestic product (GDP) are based on International Monetary Fund (IMF) estimates of the purchasing-power-parity valuation of country GDPs for 2022 from the IMF’s October 2023 World Economic Outlook. The individual shares may not add up to 100 due to rounding.[←]
- ‡ The oil-importing emerging-market economies (EMEs) grouping excludes China. It is composed of large EMEs from Asia, Latin America, the Middle East, Europe and Africa (such as India, Brazil and South Africa) as well as newly industrialized economies (such as South Korea).[←]
- § “Rest of the world” is a grouping of other economies not included in the first five regions. It is composed of oil-exporting EMEs (such as Russia, Nigeria and Saudi Arabia) and other advanced economies (such as Canada, the United Kingdom and Australia).[←]
Sources: National sources via Haver Analytics, and Bank of Canada calculations and projections
Find out more on the global economic outlook in the Global economy section.
Changes to the projection
The following changes to the Canadian and global outlooks have impacted our economic projection since the April Report.
Global outlook
The outlook for global growth is broadly in line with that in the April Report, although, in the near term, the composition is somewhat different. The 2024 outlook for emerging-market economies (EMEs) and the euro area is stronger, while for the United States, the outlook for growth is weaker.
- EME growth has been revised up, reflecting stronger investment and exports.
- Euro area growth has been revised up due to an earlier-than-expected recovery in services activity.
- Growth in the United States has been revised down, partly because of lower household spending on consumption and residential investment.
Canadian outlook
The outlook for population growth in Canada has been revised up. Inflation is expected to continue easing broadly in line with the April Report.
- The changes to population are expected to add to both demand and supply and are roughly offsetting on the output gap. The growth rate of the working-age population is assumed to be roughly 0.2 percentage points higher in 2024 and about 0.6 percentage points higher in 2025–26 (see Key inputs to the projection in the Projections section)
- Growth in the first quarter of 2024 was roughly 1 percentage point lower than projected. This was in part the result of weaker-than-expected motor vehicle exports because the impacts of retooling were felt more quickly than anticipated. Residential investment was also below expectations, largely because of slower growth in new construction.
- The forecast for growth is roughly unchanged in 2025 and is revised up by one-half of a percentage point in 2026. The change in 2026 is due to upward revisions to the assumptions for population growth. Population growth is expected to decline, but not as quickly as previously forecast.
- In contrast, growth in gross domestic product per person is expected to be around three-quarters of a percentage point weaker in 2025 and roughly unchanged in 2026. Household spending is projected to be lower, in line with survey evidence that shows consumers remain cautious in the face of higher prices and interest rates. As a result, excess supply is expected to be slightly larger over the course of the projection horizon.
Consumer price index inflation came in 0.2 percentage points weaker than expected in the second quarter of 2024.
- Inflation in goods excluding food and energy has fallen faster than anticipated, moving more in line with input costs.
- In 2025, inflation is forecast to be 0.2 percentage points higher, due in part to stronger-than-expected effects of property tax increases. In 2026, inflation is projected to be 0.1 percentage point lower relative to the April Report.
- In contrast, core inflation is 0.1 percentage point lower in 2025 and 2026, reflecting slightly greater excess supply over the projection.
Key inputs to the projection
The Bank of Canada’s projection is conditional on several key inputs and assumptions about their future path. The Bank regularly reviews these assumptions and adjusts the economic projection accordingly.
Population growth
At the time of the April Report, population growth of people aged 15 and older was assumed to slow from 3.3% in the first half of 2024 to 1.0% on average over 2025 and 2026. The path incorporated a sharp decrease in net inflows of non-permanent residents (NPRs) beginning in the second half of 2024.1 On March 21, 2024, the federal government announced plans to reduce net inflows of NPRs to lower their share of the total population from 6.2% to 5% within three years. Overall, this implied that the annual population growth rate would decline by about 2 percentage points in 2025 and 2026.
NPRs represented 6.8% of the population at the beginning of April—much higher than at the time of the March announcement—and the share is expected to continue rising over the near term. This suggests that it will take longer for planned policies to reduce NPR inflows to achieve the 5% target (Chart 17). Overall, population growth of people aged 15 and older is now assumed to be 3.3% in 2024 and 1.7% in 2025–26. Compared with the April Report, this is higher by:
- 0.2 percentage points in 2024
- 0.7 percentage points in 2025
- 0.6 percentage points in 2026
Considerable uncertainty continues to surround the future path of net NPR flows.2 Details on how most temporary resident permit programs will be adjusted are not expected until later this year. The Bank’s scenario will be revised as further measures are announced and more details on program changes become available.
Other key inputs
The other key inputs to the Bank’s projection are as follows:
- Potential output growth in Canada is expected to slow from about 2.4% in 2024 to around 1.9% on average over 2025 and 2026. Relative to the April Report, potential output growth has been revised down by 0.1 percentage point in 2024. It has been revised up by 0.1 percentage point in 2025 and 0.5 percentage points in 2026.
- Population growth of persons aged 15 and older is revised up by 0.2 percentage points in 2024, 0.7 percentage points in 2025 and 0.6 percentage points in 2026.
- This is offset by downward revisions to trend labour productivity growth averaging 0.4 percentage points in 2024 and 2025. This downward revision partly reflects the constraints on housing construction coming from structural factors, such as the availability of land, zoning restrictions and a lack of skilled labour.
- Growth in real gross domestic product is estimated to be about 1.5% in the second quarter of 2024. As a result, the Bank estimates that the output gap is between ‑0.75% and -1.75% in the second quarter, roughly unchanged from its estimated level in the first quarter of 2024.3
- The projection incorporates information from provincial and federal budgets that have been tabled at the time of writing.
- Over the projection horizon, the per-barrel prices for oil in US dollars are assumed to be $85 for Brent, $80 for West Texas Intermediate and $65 for Western Canadian Select. These prices are the same as in the April Report.
- By convention, the Bank does not forecast the exchange rate in the Monetary Policy Report. The Canadian dollar is assumed to remain at 73 cents US over the projection horizon, close to its recent average and 1 cent lower than the assumption in the April Report.
- The nominal neutral interest rate in Canada is estimated to be in the range of 2¼% to 3¼%, unchanged from the April Report. The nominal neutral interest rate is defined as the real neutral rate plus 2% for inflation. The economic projection assumes that the neutral rate is at the midpoint of this range. The real neutral rate is the rate to which the policy rate would converge in the long run, when output is sustainably at its potential and inflation is at target (i.e., after all cyclical shocks have dissipated). It is a medium- to long-term equilibrium concept.
Endnotes
- 1. NPRs include temporary foreign workers, international students and asylum seekers.[←]
- 2. If NPRs continue to either leave Canada or become permanent residents at rates observed since 2021, achieving the target would require reducing average annual gross inflows by around 70% to 80% across multiple programs over the next three years. These programs include the temporary foreign workers program, the international mobility program and asylum seeker programs. The reductions would be in addition to those coming from the cap on the number of international students and the expiry of the Canada–Ukraine authorization for emergency travel program.[←]
- 3. The output gap for the first quarter of 2024 was revised to be 0.2 percentage points wider, reflecting weaker-than-expected growth.[←]