Research to Insights: Perspectives on growth, inflation and affordability

About Research to Insights

The Research to Insights series of presentations features a broad range of findings on selected research topics. Each presentation draws from and integrates evidence from various studies that use innovative and high-quality data and methods to better understand relevant and complex policy issues.

Based on applied research of valuable data, the series is intended to provide decision makers, and Canadians more broadly, a comprehensive and horizontal view of the current economic, social and health issues we face in a changing world.

Context

• Economic activity has slowed as households and businesses adjust to higher borrowing costs.
• Population growth has outpaced recent employment gains as the unmet demand for labour eases.
• Per capita output and business productivity are trending lower and are currently below levels observed before the COVID-19 pandemic.
• Pressures on affordability show little signs of easing.
• Financial pressures are continuing to build on younger households and those with lower and middle incomes.

Economic activity slows as consumers rein in spending

• Household spending slowed in the second quarter of 2023, with lower outlays on many consumer durables. Retail volumes were down 1.3%, despite higher labour incomes.
  • The economy-wide stock-to-sales ratio reached its highest level since the initial COVID-19 lockdowns.
• Economy-wide output has been flat, on trend, from February to August. Wildfires in the spring impacted resource extraction, while auto manufacturing continued to rebound from supply disruptions. Declines in homebuilding continued to weigh on growth.

Data table for Chart 1



Data table for Chart 1
Table summary
This table displays the results of Data table for Chart 1 Gross domestic product (LHS) and Policy rate (RHS), calculated using month-over-month percentage growth and percent units of measure (appearing as column headers).

		Gross domestic product (LHS)	Policy rate (RHS)
		month-over-month percentage growth	percent
2021	June	0.81	0.25
	July	0.53	0.25
	August	0.59	0.25
	September	0.33	0.25
	October	0.79	0.25
	November	0.47	0.25
	December	0.12	0.25
2022	January	-0.22	0.25
	February	0.68	0.25
	March	0.67	0.50
	April	0.07	1.00
	May	0.28	1.00
	June	0.24	1.50
	July	0.12	2.50
	August	0.24	2.50
	September	0.12	3.25
	October	0.02	3.75
	November	0.12	3.75
	December	-0.09	4.25
2023	January	0.61	4.50
	February	0.06	4.50
	March	0.02	4.50
	April	-0.09	4.50
	May	0.22	4.50
	June	-0.16	4.75
	July	-0.01	5.00
	August	0.04	5.00
Notes: LHS refers to left hand scale and RHS refers to right hand scale. Sources: Statistics Canada, table 36-10-0434-01 and Bank of Canada.

A weaker outlook: In the third quarter, about two-thirds of businesses were optimistic about their outlook over the next year, down from about three in four businesses in the second quarter.

Employment growth moderates as job vacancies ease

• The pace of employment growth has slowed recently, with monthly gains averaging 30,000 from February to September 2023.
• The unmet demand for workers continued to ease—down 32% from peak levels—while the number of unemployed people rose 131,000 from April to September.
• In the second quarter, more than one-third of businesses anticipated challenges in recruiting skilled employees in the coming months. Four in 10 businesses expected workforce-related obstacles to limit their growth, while 1 in 3 anticipated hiring less-qualified candidates.

Data table for Chart 2



Data table for Chart 2
Table summary
This table displays the results of Data table for Chart 2 Job vacancies (RHS) and Unemployment-to-job vacancy ratio (LHS), calculated using number of job vacancies and percent units of measure (appearing as column headers).

		Job vacancies (RHS)	Unemployment-to-job vacancy ratio (LHS)
		number of job vacancies	percent
2022	January	938,195	1.4
	February	921,430	1.2
	March	990,015	1.1
	April	993,625	1.1
	May	1,003,240	1.1
	June	984,175	1.0
	July	974,990	1.0
	August	923,225	1.2
	September	911,885	1.2
	October	885,755	1.2
	November	872,605	1.2
	December	846,525	1.2
2023	January	864,125	1.2
	February	835,120	1.3
	March	800,750	1.3
	April	800,165	1.3
	May	775,640	1.4
	June	741,570	1.5
	July	697,945	1.7
	August	682,390	1.7
Notes: LHS refers to left hand scale and RHS refers to right hand scale. Sources: Statistics Canada, tables 14-10-0287-01 and 14-10-0432-01.

Labour shortages more apparent among lower-skilled occupations: Early in the pandemic, the demand for lower-skilled workers outpaced the potential supply of available candidates. Toward the middle of 2023, this imbalance was no longer apparent, as vacancies for lower-skilled occupations have pulled back.

For more information: Unemployment and job vacancies by education, 2016 to 2022.

Population growth outpaces employment growth

• Both the working-age population and labour force are expanding at a substantially faster pace in 2023, within the context of strong population growth.
• With population growth outpacing recent employment gains, the employment rate (the percentage of working-age people who are employed) has edged lower and is currently similar to its pre-pandemic baseline.
• Recent population increases will not alleviate the overall impacts of population aging on the labour market, with about one in four workers expecting to retire in the coming decade.

Data table for Chart 3



Data table for Chart 3
Table summary
This table displays the results of Data table for Chart 3 2022 and First nine months of 2023, calculated using thousands of persons units of measure (appearing as column headers).

	2022	First nine months of 2023
	thousands of persons
Employment	34.1	43.1
Labour force	18.1	59.3
Working age population	41.4	78.8
Source: Statistics Canada, table 14-10-0287-01.

Challenges related to skill utilization: Immigrants and non-permanent residents account for less than one-third of the working-age population, but for more than half of those with postgraduate degrees. Almost two-thirds of immigrants with a foreign bachelor’s degree in nursing (or higher) do not work in their field. Immigrants with a foreign degree are twice as likely as Canadian-born degree holders to be overqualified.

Declines in gross domestic product per capita portend lower living standards

• Economic growth, measured on a per capita basis, stagnated during the pandemic, as increases in real output did not keep pace with population growth. Real gross domestic product (GDP) per capita fell in the second quarter of 2023, the third decline in the past four quarters.
• Increases in GDP per capita can be driven by three factors:
  • higher labour productivity (output per hour worked)
  • higher work intensity (hours worked per job)
  • a higher employment-to-population ratio.
• In the four decades leading up to the pandemic, nearly all of the increase in GDP per capita reflected increases in labour productivity. Structural trends related to population aging and work intensity suggest that productivity will remain the key driver of living standards in the post-pandemic era.

Data table for Chart 4



Data table for Chart 4
Table summary
This table displays the results of Data table for Chart 4 GDP per capita and Trend in GDP per capita, calculated using Index Q1 1981 = 100 units of measure (appearing as column headers).

		GDP per capita	Trend in GDP per capita
		Index Q1 1981 = 100
1981	Q1	100.00	100.00
	Q2	100.85	100.42
	Q3	99.59	100.84
	Q4	98.74	101.26
1982	Q1	97.35	101.68
	Q2	95.98	102.10
	Q3	94.85	102.52
	Q4	93.69	102.94
1983	Q1	95.07	103.36
	Q2	96.72	103.78
	Q3	97.55	104.20
	Q4	98.51	104.62
1984	Q1	100.02	105.05
	Q2	101.75	105.47
	Q3	101.91	105.89
	Q4	103.24	106.31
1985	Q1	104.63	106.73
	Q2	104.74	107.15
	Q3	105.79	107.57
	Q4	107.12	107.99
1986	Q1	106.89	108.41
	Q2	107.26	108.83
	Q3	107.06	109.25
	Q4	105.94	109.67
1987	Q1	108.10	110.09
	Q2	109.12	110.51
	Q3	110.36	110.93
	Q4	111.38	111.35
1988	Q1	112.75	111.77
	Q2	113.42	112.19
	Q3	112.96	112.61
	Q4	113.15	113.03
1989	Q1	114.02	113.45
	Q2	113.97	113.87
	Q3	113.83	114.29
	Q4	113.07	114.71
1990	Q1	113.88	115.14
	Q2	112.98	115.56
	Q3	111.68	115.98
	Q4	110.22	116.40
1991	Q1	108.46	116.82
	Q2	108.68	117.24
	Q3	108.41	117.66
	Q4	108.26	118.08
1992	Q1	108.13	118.50
	Q2	107.92	118.92
	Q3	108.12	119.34
	Q4	108.34	119.76
1993	Q1	108.80	120.18
	Q2	109.54	120.60
	Q3	110.26	121.02
	Q4	110.34	121.44
1994	Q1	111.78	121.86
	Q2	113.13	122.28
	Q3	114.21	122.70
	Q4	114.66	123.12
1995	Q1	115.55	123.54
	Q2	115.32	123.96
	Q3	115.11	124.38
	Q4	115.21	124.80
1996	Q1	115.10	125.23
	Q2	115.63	125.65
	Q3	116.25	126.07
	Q4	116.80	126.49
1997	Q1	118.17	126.91
	Q2	119.24	127.33
	Q3	120.30	127.75
	Q4	121.10	128.17
1998	Q1	122.67	128.59
	Q2	122.53	129.01
	Q3	123.34	129.43
	Q4	124.70	129.85
1999	Q1	126.84	130.27
	Q2	127.67	130.69
	Q3	129.30	131.11
	Q4	130.73	131.53
2000	Q1	132.67	131.95
	Q2	133.95	132.37
	Q3	134.91	132.79
	Q4	134.71	133.21
2001	Q1	135.24	133.63
	Q2	135.23	134.05
	Q3	134.66	134.47
	Q4	135.01	134.89
2002	Q1	136.84	135.32
	Q2	137.27	135.74
	Q3	137.99	136.16
	Q4	138.34	136.58
2003	Q1	138.98	137.00
	Q2	138.47	137.42
	Q3	138.57	137.84
	Q4	139.12	138.26
2004	Q1	139.94	138.68
	Q2	141.30	139.10
	Q3	142.55	139.52
	Q4	143.13	139.94
2005	Q1	143.46	140.36
	Q2	144.20	140.78
	Q3	145.49	141.20
	Q4	146.43	141.62
2006	Q1	147.43	142.04
	Q2	147.16	142.46
	Q3	147.12	142.88
	Q4	147.21	143.30
2007	Q1	147.98	143.72
	Q2	149.10	144.14
	Q3	149.26	144.56
	Q4	148.92	144.99
2008	Q1	148.81	145.41
	Q2	149.01	145.83
	Q3	149.69	146.25
	Q4	147.40	146.67
2009	Q1	143.83	147.09
	Q2	141.90	147.51
	Q3	142.04	147.93
	Q4	143.15	148.35
2010	Q1	144.66	148.77
	Q2	145.07	149.19
	Q3	145.60	149.61
	Q4	146.68	150.03
2011	Q1	147.64	150.45
	Q2	147.65	150.87
	Q3	149.21	151.29
	Q4	149.87	151.71
2012	Q1	149.71	152.13
	Q2	149.87	152.55
	Q3	149.55	152.97
	Q4	149.33	153.39
2013	Q1	150.47	153.81
	Q2	151.02	154.23
	Q3	151.71	154.65
	Q4	152.74	155.08
2014	Q1	152.83	155.50
	Q2	153.90	155.92
	Q3	154.88	156.34
	Q4	155.41	156.76
2015	Q1	154.49	157.18
	Q2	153.91	157.60
	Q3	154.06	158.02
	Q4	153.66	158.44
2016	Q1	154.29	158.86
	Q2	153.11	159.28
	Q3	154.10	159.70
	Q4	154.32	160.12
2017	Q1	155.76	160.54
	Q2	156.99	160.96
	Q3	157.02	161.38
	Q4	157.08	161.80
2018	Q1	158.12	162.22
	Q2	158.93	162.64
	Q3	159.31	163.06
	Q4	159.05	163.48
2019	Q1	158.85	163.90
	Q2	160.00	164.32
	Q3	159.83	164.74
	Q4	159.47	165.17
2020	Q1	155.67	165.59
	Q2	138.38	166.01
	Q3	150.77	166.43
	Q4	153.98	166.85
2021	Q1	155.85	167.27
	Q2	154.60	167.69
	Q3	156.40	168.11
	Q4	158.18	168.53
2022	Q1	158.83	168.95
	Q2	159.72	169.37
	Q3	159.44	169.79
	Q4	157.91	170.21
2023	Q1	157.83	170.63
	Q2	156.60	171.05
Sources: Statistics Canada, tables 36-10-0207-01 and 17-10-0009-01.

Getting back to trend is no small task: GDP per capita would have to expand by an average of 1.5% per year over the next decade to get back to its historical long-term growth rate. This is a similar pace to that observed in the 1990s, when the population was increasing at a slower pace.

Raising of living standards will depend on productivity growth

• After rising sharply in the early stages of the pandemic, labour productivity has declined in 11 of the past 12 quarters and is below pre-pandemic levels.
• A key driver of productivity growth is business investment in non-residential structures and machinery and equipment, which has pulled back since the oil price shock in the mid-2010s.
  • While non-residential business investment rebounded to pre-COVID-19 levels by mid-2022, current outlays remained 14% below peak levels from 2014.
• Companies have been changing how information and communications technology (ICT) inputs are being integrated into their production systems. Over the last decade, spending on ICT services as intermediate inputs, possibly linked to cloud computing and other advances in data management, has risen at a faster pace than traditional outlays on ICT capital.

Data table for Chart 5



Data table for Chart 5
Table summary
This table displays the results of Data table for Chart 5 Labour productivity and Real total compensation per hour worked, calculated using index (Q1 2018=100) units of measure (appearing as column headers).

		Labour productivity	Real total compensation per hour worked
		index (Q1 2018=100)
2018	Q1	100	100
	Q2	101	99
	Q3	100	99
	Q4	100	102
2019	Q1	101	102
	Q2	100	101
	Q3	101	102
	Q4	101	102
2020	Q1	106	109
	Q2	119	131
	Q3	107	112
	Q4	106	108
2021	Q1	105	104
	Q2	103	104
	Q3	102	103
	Q4	101	100
2022	Q1	101	100
	Q2	101	97
	Q3	101	99
	Q4	100	101
2023	Q1	99	102
	Q2	99	103
Source: Statistics Canada, table 36-10-0206-01.

New sources of growth: The widespread adoption of digital services, accelerated by the pandemic, may provide an important source of productivity growth akin to the integration of information and communications technology in the 1990s.

As headline inflation eases, pressures on living costs remain

• Much of the slower pace of headline inflation during the first half of 2023 reflected steep year-over-year declines in gas prices. The pace of food inflation has begun to ease, but prices for many household staples remain elevated.
  • Grocery prices have risen by 21% since inflationary pressures began to build in early 2021. The growth in average weekly earnings over this period was 7.8%.
• Shelter costs also remain high, bolstered by a 31% year-over-year increase in mortgage interest costs, the main upward contributor to inflation in recent months.
• Higher rental prices were the second-largest upward contributor to headline inflation from March to September.

Data table for Chart 6



Data table for Chart 6
Table summary
This table displays the results of Data table for Chart 6 Percent (appearing as column headers).

	Percent
Food purchased from stores	20.7
Shelter	17.8
All-items CPI	14.7
Average hourly wage	10.6
Average weekly earnings (to August)	7.8
Note: CPI refers to Consumer Price Index. Sources: Statistics Canada, tables 18-10-0004-01, 14-10-0065-01, and 14-10-0223-01.

While inflation eases, prices continue to rise: Prices continued to rise in 2023. The pace of price growth during the first nine months of the year (+3.5%) was moderately slower than price growth during the first nine months of 2021 (+4.0%), when inflationary pressures were building.

Escalating homeownership and rental costs create barriers to mobility

• The Bank of Canada’s housing affordability index was near or above 50% for five consecutive quarters. This means about half of average disposable income is going to mortgage-related costs and utility fees.
• Rising borrowing costs have pushed many potential homeowners out of the market, straining an already hot rental market. Average asking rents rose to a record $2,149 in September 2023 (Rentals.ca).
• In 2022, 56% of Canadians were very or somewhat concerned about whether they could afford housing or rent, while 24% delayed buying a home or moving to a new rental because of rising prices.

Data table for Chart 7



Data table for Chart 7
Table summary
This table displays the results of Data table for Chart 7 Percent and Benchmark (appearing as column headers).

	Percent	Benchmark
Canada	39.2	212,200
Greater Vancouver	31.2	288,700
Calgary	34.5	142,400
Winnipeg	23.0	64,700
Greater Toronto	42.5	343,600
Montréal	40.1	150,300
Halifax / Dartmouth	69.5	219,900
Source: Canadian Real Estate Association.

Barriers to homeownership may have long-term economic impacts: The average per capita net worth of homeowners without a mortgage is $1.7 million, while renters have an average per capita wealth of $232,000. Homeownership has traditionally been a particularly important source of wealth creation for immigrants.

For more information: The Wealth of Immigrant Families in Canada.

The pace of homebuilding slowed during the first half of 2023

• Activity in the residential construction sector has pulled back sharply as borrowing costs have risen—real output in August 2023 was down 20% from levels in March 2022.
• Monthly housing starts averaged 235,000 (annualized) during the first half of 2023, down from 270,000 in the second half of the previous year. Annual price increases for residential building construction averaged 7.4% in the second quarter of 2023.
• Canada Mortgage and Housing Corporation has estimated that Canada will need an additional 3.45 million homes by 2030 to address affordability pressures in the housing market.
  • To meet this target, the pace of homebuilding would have to double to over 500,000 units annually.

Data table for Chart 8



Data table for Chart 8
Table summary
This table displays the results of Data table for Chart 8 Residential construction , Non-residential construction and Engineering construction , calculated using index (January 2021 = 100) units of measure (appearing as column headers).

		Residential construction	Non-residential construction	Engineering construction
		index (January 2021 = 100)
2021	January	100	100	100
	February	103	101	101
	March	106	103	101
	April	111	101	102
	May	105	100	103
	June	101	99	103
	July	98	100	104
	August	97	100	104
	September	96	101	105
	October	97	102	107
	November	96	102	108
	December	94	102	110
2022	January	97	102	109
	February	98	103	110
	March	100	102	110
	April	97	103	112
	May	96	99	113
	June	95	99	114
	July	94	100	114
	August	94	100	114
	September	92	100	116
	October	92	101	118
	November	91	101	120
	December	89	100	121
2023	January	88	100	124
	February	85	99	125
	March	85	100	126
	April	83	101	128
	May	81	99	129
	June	79	98	130
	July	79	99	129
	August	80	99	128
Source: Statistics Canada, table 36-10-0434-01.

Construction employment pulls back: Total employment in construction has declined by 55,000 since January 2023, contributing to the slower pace of employment growth that Canada has experienced in recent months. The job vacancy rate in construction remains well above pre-pandemic levels.

Pressures on affordability from rising living costs disproportionately impact younger and financially vulnerable households

• Income and wealth inequality are rebalancing to pre-pandemic norms. Among low income households, net savings have declined over the past year as income gains have not kept pace with rising living expenses, while high income households have seen their net savings increase.
• Younger families bear more risk as interest rates rise and debt-to-income ratios remain high. Over the last year, younger households have seen the largest increases in their debt service ratios.
• Young households have also reduced their mortgage balances. This suggests that prospective young homeowners may be turning away from the housing market, while current homeowners may be paying off existing mortgage debt or moving into more affordable accommodations.

Data table for Chart 9



Data table for Chart 9
Table summary
This table displays the results of Data table for Chart 9 Percent (appearing as column headers).

	Percent
Younger than 35 years	189.6
35 to 44 years	257.6
45 to 54 years	244.2
55 to 64 years	173.9
65 years and older	71.9
Source: Statistics Canada, table 36-10-0664-01.

Looking forward: High interest rates and inflation are likely to continue straining households’ ability to make ends meet without going further into debt, especially among younger and lower-income families. In late 2022, more than one-third of those aged 35 to 44 said they would be unable to cover an unexpected expense of $500.

Takeaways

• Affordability challenges will persist even as consumer inflation eases. Soaring housing and rental prices, owing to strong demand and weak supply, pose substantial risks to social and economic mobility. Financial and economic risks are amplified for certain demographic groups, particularly young families.
• Recent employment gains are not keeping pace with increases in the working-age population, putting downward pressure on the employment rate. Over the first nine months of 2023, the working-age population expanded by nearly 80,000 per month, almost twice the average pace observed in 2022.
• The improvement of living standards over the longer term will require sustained increases in labour productivity, which has continued to trend lower in recent quarters. Strategies to bolster investment, innovation and skill utilization will be important drivers of improvements in GDP per capita.

For more information, please contact
analyticalstudies-etudesanalytiques@statcan.gc.ca