The quick deflation of the housing boom brought on by rising interest rates has taken the wind out of a major contributor to the economy.
Ontarians who carry heavy debt loads are being hit by the “nasty combination” of higher borrowing costs and inflation. As a result RBC expects household spending to fall, with discretionary items the first to go.
Ontario manufacturers have been hit by global supply chain disruptions over the past few years, but demand hasn’t been a problem, said RBC. Now with a slowdown impacting markets here and aboard, the economists see demand waning and manufacturing activity slowing in the year ahead.
British Columbia, with the heaviest household debt load in the country, is especially sensitive to rising interest rates. Like Ontario, the housing market which supported the recovery through much of the pandemic has turned and RBC sees a “deeper pullback” in residential investment and household spending this year.
The outlook isn’t great for non-residential investment either. Major projects in the province, such as the Site C hydroelectric dam, LNG Kitimat and Coastal Gasoline pipeline, are either winding down or are past the ramping-up stage, said the report, and won’t be contributing to growth.
Nor does there appear to be anything in the pipeline to take their place, with the start of liquid natural gas production still a few years away, they said. RBC expects real GDP in British Columbia to inch up 0.3 per cent in 2023.
Quebec’s economy was already showing signs of slowing late last year. The solid increases manufacturers enjoyed earlier in the pandemic when demand was high are slipping, and RBC expects that will broaden to the services sector this year as Quebecers tighten their belts.
A possible recession in the U.S., Quebec’s biggest foreign market, will also dampen demand for exports. “Added to a more challenging outlook for consumers and businesses at home, we think this will keep many Quebec manufacturers on the defensive in the year ahead,” said the report.
Quebec’s outlook for real GDP growth this year, according to RBC — a big flat zero.
It would be remiss not to mention the one province in Canada where you’re not likely to hear the R-word this year — Alberta.
“Our forecast calls for a solid 1.9 per cent growth in 2023, outpacing all other provinces,” said the RBC report.
Much is down to a stronger energy sector. RBC expects oil prices will be 54 per cent above pre-pandemic levels in 2023; drilling activity is expected to continue to rise; and the completion of the Trans Mountain pipeline expansion could expand exports. Investment in decarbonization is also on the rise. Work on Canada’s largest solar farm is almost done in Alberta’s Sun Belt, and smaller projects are starting, the economists said.
Alberta’s economy is also benefiting from a stronger housing market. Lower prices have attracted migrants from within Canada and abroad, and housing starts are expected to rise in 2023.
Still, no province can completely escape slower growth. The 1.9 per cent gain RBC forecasts for 2023 is a big comedown from the 4.9 per cent growth it expects Alberta saw in 2022.
Across Canada, higher debt payments and inflation are expected to subtract an additional $3,000 from a household’s purchasing power this year, RBC said.
“While there’s plenty to cheer about, Alberta households aren’t immune to the challenges posed by soaring interest rates and high inflation.”