Q2 2022 Macroeconomic snapshot: Economic conditions are tightening

Outlook
Canada’s economic growth is expected to be strong in Q2, as the Canadian economy is largely re-opened. Challenges related to a tight labour market, lingering supply-chain issues and high inflation are offset by robust consumer spending, exports and business investments. The Russian invasion of Ukraine lifted commodity prices, notably energy, contributing to elevating global inflation. Inflation in Canada rose to decade highs in Q1 2022, and the Bank of Canada (BoC) is increasing its policy rate in earnest to combat it. The BoC’s overnight rate increased 50bp on June 1 and now sits at 1.50% compared to 0.25% at the start of the year. We now expect the overnight rate to finish the year at 2.50%.

GDP
GDP growth was weaker in Q1 compared to Q4 2021 but remained healthy (Figure 1). Inflation is eating into household savings and reducing purchasing power, leading some households to draw liquidity from lines of credit to sustain spending. However, debt outstanding from credit lines remains below pre-COVID levels (Figure 2). U.S. GDP contracted in the quarter. Rumblings of a future recession are growing in the U.S., and Canada is susceptible to weakness in the American economy. The good news is with higher commodity prices and strong overseas demand, Canada’s trade balance has been very healthy compared to the U.S.

GDP growth in Canada is expected to be 4.2% in Q2 before moderating into 2023 into the 2-3% growth range. Foodservices, accommodations and travel spending are picking up, and higher prices will continue to support exports. Supply disruptions continue to limit some upside... Read More