Canada’s economy ended 2022 with a ‘thud.’ What does that mean for a recession?

Canada’s economy stalled to end 2022, new data shows, but some economists say strong underlying demand could keep a recession at bay for longer or skirt the downturn entirely.

Statistics Canada said Tuesday that real gross domestic product (GDP) was “nearly unchanged” in the final quarter of last year, snapping a streak of growth for the preceding five quarters.

The actual GDP figures were a surprise to many economists, with the consensus expecting growth of 1.6 per cent in the fourth quarter. The Bank of Canada had expected growth of 1.3 per cent last quarter.

“It was a little bit shocking when we saw that,” says James Orlando, senior economist with TD Bank.

Orlando tells Global News that while flat growth might sound grim — he called it a “thud” of an economic release in a note to clients Tuesday — the details reveal more strength in the economy than the headline number suggests.

For instance, lower inventory accumulations were the main drag on GDP last quarter, StatCan said, following record growth for this segment in the second and third quarters of 2022.

Orlando says this is mostly an aftershock from the COVID-19 pandemic still reverberating through the economy. Businesses rushed to build their inventories back up after pandemic restrictions lifted — hence the record quarters — but pumped the brakes on production towards the end of the year when fears of a recession started to show on the horizon.

“For a business, you don’t want to be stuck with a lot of inventory if the economy slows down,” Orlando says.

StatCan said businesses’ investments in machinery, equipment and housing declined in the final months of 2022, though Orlando says that was roughly in line with what economists expected.

Hidden in the flat GDP reading was solid consumer demand, Orlando noted, with spending here up two per cent annually.

“You’ve got to look past the inventories to see the underlying decent fundamentals in the economy, specifically on the consumer side,” he says.

While Statistics Canada said real GDP declined by 0.1 per cent in December, the agency also said early indications suggest growth of 0.3 per cent month-to-month in January.

A few economic readings support the strong start to the year, Orlando notes. TD’s credit card tracker suggests Canadians kept spending in January despite expectations of an economic slowdown; a blockbuster jobs report for the month also supports continued demand from consumers.

Despite the Q4 “thud,” TD Bank expects growth in the first quarter of 2023 will rebound to 0.3 per cent annualized.

This pushes against thinking that Canada could start the new year in a recession, Orlando says. While TD is expecting an economic slowdown with negative growth in the third quarter, the bank is not currently calling for a recession in 2023.

Orlando says the strong jobs figures – the economy added 150,000 positions in January – are backing continued spending from Canadian households, which can in turn buoy GDP growth and push economic activity higher overall this year.

“It goes against the narrative of the hard landing,” he says.

“Everyone is expecting the slowdown in spending, the slowdown in the labour market, but the impact of the good data we’ve got could keep carrying through and keep this momentum going for a little while longer.”

Not all economists are sure that a strong start to 2023 is enough to skirt a recession this year.

Stephen Brown, deputy chief North America economist at Capital Economics, acknowledges that the economy will probably grow “marginally” in the first quarter of 2023, but he doesn’t expect that momentum to last.

He points to the “temporary” nature of some of the factors fuelling the strong advance numbers for January, including relatively warmer weather across the country, which tends to be favourable for consumer spending.

Leading indicators such as business sentiment surveys suggest GDP is set to stagnate or outright decline through the middle of the year, Brown says.

“I think the risks of recession are still real and we are still forecasting a recession over the second and third quarters.”

Brown notes, however, that he doesn’t expect a large rise in overall unemployment in Canada during the downturn, as some sectors, such as high-touch services including travel and dining out, continue their long recovery from the pandemic.

The latest provincial outlook from The Conference Board of Canada released Tuesday meanwhile predicts the country will see very little improvement in the economy this year and at least one quarter of negative economic growth.

But the think tank also says the worst-case scenarios of a protracted recession or highly destabilized labour and capital markets are becoming less likely.

Among the provinces, the report says Newfoundland and Labrador will have the fastest-growing economy this year as the Terra Nova offshore oil platform returns to production.

The Conference Board says the Alberta and Saskatchewan economies will also perform well in the near term, powered by the oil and gas sector and favourable outlooks in agriculture.

On the other end of the spectrum, the report says the economies of Quebec and New Brunswick will be nearly flat this year before returning to growth in 2024.

Orlando said the central bank’s governing council likely “feels vindicated” about its plans for a conditional pause in interest rate increases to assess whether their hikes to date have been effective enough in cooling down the economy and, by extension, inflation.

“The Bank of Canada doesn’t really have to do anything,” he says.

“Obviously, they’re going to be sitting, watching, making sure that things don’t really start to surge too much. But I think they’re going to be pretty content being where they are and just watching the incoming data.”

Brown says the Bank of Canada, which is set to announce its next interest rate decision March 8, finds itself in a distinct position from its peers in central banking. Price pressures are proving “a bit stickier than expected” in the U.S. and Europe he says, while the inflation outlook in Canada is “quite encouraging,” coming in lower than expected at annual rate of 5.9 per cent last month.

“Coupled with GDP being weaker than expected, that’s all consistent with the bank remaining comfortable with this conditional pause that it told us about in January,” he says.

The Bank’s policymakers are likely to remain cagey on timing for interest rate cuts, Brown says, with the upside risks to inflation keeping odds closer to additional hikes than reductions in the months ahead.

— with files from The Canadian Press