November 16, 2023
Looking back at the year the Bank of Canada started hiking interest rates, things looked pretty good. Canada’s real gross domestic product grew 3.8 per cent in 2022, with GDP rising in nine provinces. Saskatchewan led the pack with 6 per cent growth, followed by Alberta, at 5 per cent, according to provincial numbers released last week by Statistics Canada.
But while growth looked good on the surface, Marc Desormeaux, principal economist at Desjardins, spots several “troubling details” in the data that showed the early impacts of the most aggressive interest-rate hiking cycle in recent history.
In an effort to curb soaring inflation after the pandemic, the Bank of Canada raised its policy interest rate from 0.25 to 4.25 per cent in 2022. Three more rate hikes in 2023 brought the rate to the current 5 per cent. “We already knew how much of a drag housing posed at the national level last year as interest rates rose sharply, but the breadth of weakness and depth in some regions was striking,” said Desormeaux in a note.
After hitting record-highs in 2021, housing investment dropped 12.1 per cent in 2022, falling in seven provinces, a count only exceeded during severe recessions in the past, he said. Residential capital’s share of economic output in 2022 was below the average of the decade before the pandemic everywhere except in the Maritimes.
In Ontario, Quebec and British Columbia, this investment fell by more than at any point since the 1990s. In Ontario and B.C., the economies where the housing market holds the biggest sway, growth would have been over 5 per cent if it was not for the decline in real estate, said Desormeaux. As it was, 2022 GDP for Ontario came in at 3.9 per cent and 3.8 per cent for B.C.
Home sales in these two provinces fell sharply as interest rates climbed. When the Bank of Canada paused rates at 4.50 per cent in early 2023, the market experienced a robust recovery that surprised economists. However, the decline resumed when the Bank hiked rates again in June and July, bringing the rate to 5 per cent.
Interest rates have been on pause since then, but Desjardins sees less chance of a rebound this time. Higher borrowing costs have made the housing market even more unaffordable, and the “higher for longer” narrative from central banks will keep fixed mortgage rates elevated until the Bank of Canada cuts rates next year, said Desormeaux.
Another warning sign from 2022 was savings rates. The pile of money Canadians put away during the pandemic initially shielded consumers from the effects of high inflation and interest rates, but there were already signs that year that that defence was weakening.
Canada’s household saving rate dropped from 10.5 per cent in 2021 to 5.4 per cent in 2022, as higher spending exceeded gains in income, said Statistics Canada. Ontario saw the steepest decline, falling to 3.2 per cent, mainly because of higher interest payments.
“In fact, households in this province had the highest debt service ratio in the country (8.1 per cent compared with 6.8 per cent for Canada), mainly because of increases in mortgage debt,” said Statistics Canada.
Meanwhile, Saskatchewan was the only province that saw its savings rate improve, rising to 8.7 per cent as incomes were boosted by improved crop conditions and higher grain prices. Even though the provincial GDP data is a year behind, it still provides “critical takeaways” for growth in 2023 and beyond, said Desormeaux.
The drag from the housing market and risks of greater financial stress in heavily indebted regions such as Ontario and British Columbia reinforces Desjardins’ view that oil-producing provinces such as Alberta are best positioned to weather the downturn.
