Weighty Matters for Canada

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.

final domestic demand