The Canadian economy isn’t technically in a recession; it just feels like one to most households. That was the take from Canada’s largest bank, which is raising concerns about the country’s economic setup. RBC economists warn that rapid population growth is boosting GDP, but it’s only obfuscating reality. More meaningful economic indicators, such as household consumption and employment, are eroding at a pace never before seen outside of recession.
Canada’s Rapid Population Growth Is Hiding A Weak Economy
Canada defines a recession as two consecutive quarters of declining real gross domestic product (GDP). The country has managed to keep real GDP positive, thus avoiding getting hit with the dreaded label. However, the measure is growing solely due to the surging population.
“Canada’s population grew by 6% from Q2 2022 to Q1 of this year, adding 2.1 million new consumers to the economy,” explains Carrie Freestone, an economist at RBC.
She notes that consumer spending accounts for more than half of GDP, and immigration is boosting the number of consumers. That’s good for the vanity numbers, but not so much for reality.
More bluntly, the economy is only growing in aggregate. Not because people are doing well in this economy, they’re actually doing worse. Canada is just adding more consumers of necessities through an aggressive immigration scheme. Consumers are weaker, and policymakers are trying to counter that with volume instead of focusing on quality of life.
“Without higher population boosting demand, the Canadian economy almost certainly would have contracted outright over the last two years,” according to Freestone.
Canadian Households Face Recession-Like Economy, Despite The Window Dressing
Outside of aggregate GDP, major economic indicators are printing recession-like data. The bank was particularly concerned with three areas—output, household consumption, and employment.
Adjusting output to the population paints a very different picture than the aggregate data. Per-capita real GDP has declined in six of the past seven quarters, and is now 3.1% below 2019 levels. The decline over the past few months was so sharp, it’s the largest observed outside of recession.
Declining per-capita output is often a sign households are doing worse, and that’s confirmed by consumption. RBC notes that average household spending is down 2.6% since peaking post pandemic, and is now 2% below 2019 levels. This is partially attributed to inflation and rising interest rates, which have cut into purchasing power.
Weak demand and low output sent unemployment climbing like only a recession does. Since hitting a record low post-pandemic, the unemployment rate has climbed a whopping 1.6 percentage points. The general rule is an 0.5 point increase will result in a recession within the following 8 quarters. Canada just saw 3x that increase in a little over a year.
“… since the 1970s, Canada has never had a trough-to-peak increase in the unemployment rate of that size without the economy going through a recession,” she says.
The bank sees relief in the future, but it’s not exactly around the corner.
“We expect real per capita GDP will likely still be negative through the end of this year but will turn positive in the second half of 2025 as headwinds from higher interest rates continue to fade,” concludes Freestone.
Other forecasts have been slightly less optimistic about that timeline without a major shift to the structure of Canada’s economy.
