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Weighty Matters for Canada

The Canadian economy is buckling under the weight of higher interest rates, household debt and immigration.

Forecasters that came into 2023 expecting a downturn in advanced economies have been left surprised, with most developed markets sustaining their expansions.  Canada is a notable exception, as its economy is struggling under the weight of several burdens.

The Canadian economy shrank in the third quarter, with real gross domestic product (GDP) declining 1.1% on an annualized basis.  Though Canada has avoided a technical recession after a significant upward revision to second quarter GDP figures, the economy is struggling to grow.  The job market has retreated, with the unemployment rate rising to its highest level since January 2022.  Canada’s economic performance stands out as particularly weak compared to the resilience displayed by its southern neighbor and peers like Australia. 

One reason is that the Canadian economy is more sensitive to interest rates.  Interest-sensitive demand, defined as the sum of durable goods spending and residential and business investment, accounts for 25% of total domestic demand in Canada, compared to one-fifth in the U.S. 

Real interest rates in Canada are higher than they are in many other countries, a result of both lower inflation and higher policy rates.  By this measure, the Bank of Canada has tightened more than most other central banks. 

The high debt levels carried by Canadian households also make them more vulnerable to higher rates. According to the International Monetary Fund, the ratio of consumer debt to GDP in Canada is over 100% (as compared to 74% in the U.S.).  Mortgage holders are feeling the pinch from higher debt service costs; the majority of Canadian home loans are locked in for five years or less.

The Bank of Canada’s third quarter Survey of Consumer Expectations shows that the direct impact of rate hikes on consumer spending is not over.  More and more households are reducing spending in response to high inflation and interest rates.  Canadian business investments have dropped below pre-COVID levels. 


Another plate on the bar that Canada is trying to lift is immigration.  Canada is dealing with a huge influx of newcomers: more than one million of them arrived in 2022, the largest population spike since the post-World War II baby boom. Amid labor shortages, the Canadian government initiated efforts to recruit entrants; results exceeded expectations.  The composition was a mix of migrants and high net worth families.  Many newcomers are in their prime working years, which supported demand for consumer goods and services. 

While immigrants have helped ease labor shortages, immigration is worsening the existing housing crunch across major cities and adding to strains on infrastructure and public services.  As mortgage rates have climbed this year, real estate prices are declining; however, rental inflation is still rising at a year over year pace of over 8%.  Most newcomers initially rent, so they are driving up demand for rented accommodation amid tight supply. 

More workers and less capital will put downward pressure on productivity and wages.  Canada’s performance in boosting living standards over the past 25 years has been poor.  The country’s real GDP per capita increased by an average of only 0.8% annually over that interval, placing it 26th out of 38 developed economies.  In fact, Canada has been in a GDP per capita recession since late 2022, implying declining wealth and standards of living.

Canadian industries have one of the lowest rates of greenhouse gas emissions among major economies.  Nonetheless, the government is pressing for even higher standards.  Canada seeks to cut carbon emissions to 40%-45% of 2005 levels by 2030, up from the previous target of 30%.  It has required all new car and passenger trucks sales to be zero-emission by 2035, accelerating the previous goal by five years.  Canada is the only major country to phase out fossil fuel subsidies ahead of the 2025 deadline.  Though a positive approach environmentally, reducing carbon emissions will be costly and will limit near-term growth prospects. 

It is a difficult time for Canadians to consider transitioning away from carbon-intensive products, as they are likely to see one of the lowest gains in average living standards over the next seven years, according to the Organization for Economic Co-operation and Development (OECD).  Canada’s federal and provincial governments along with corporations are ill-prepared for the new environmental standards and regulations.  According to a KPMG survey conducted ahead of this year’s federal budget in March, the bulk of Canadian businesses want more support from the government through the transition.  Canada faces an investment gap of about $115 billion per year to achieve a net-zero emissions economy by 2050, as outlined in last year’s budget.

With the impact of past rate hikes feeding through to the Canadian economy, prospects for a strong economic recovery in 2024 are dim.  Canada might dodge a recession by a narrow margin, but sub-par growth is the price that Canada will pay for allowing such a substantial buildup of household debt and inflation pressure.  However, the real challenge for the economy lies in escaping years of weak investment, tepid productivity growth and stagnant living standards without compromising climate goals. 

Canadians have plenty of experience keeping a positive attitude in chilly conditions, but a cooling economy may become difficult to cope with. 

Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions. © 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit

Vaibhav Tandon portrait

Vaibhav Tandon

Chief International Economist
Vaibhav Tandon is the Chief International Economist within the Global Risk Management division of Northern Trust. In this role, Vaibhav briefs clients and colleagues on the economy and business conditions, supports internal stress testing and capital allocation processes, and publishes the bank's formal economic viewpoint. He publishes weekly economic commentaries and monthly global outlooks.


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