After contracting moderately in the second quarter amid new restrictions and supply-related disruptions to auto exports, Canadian real GDP is expected to rebound 3.5% annualized in the third quarter amid support from expansionary fiscal policy, high household savings, and rising energy prices. Though slipping again in July, Statistics Canada expects a hearty 0.7% bounce in August GDP. Western Canada, and Alberta in particular, has struggled with the Delta variant, but Central Canada was less impacted. The auto industry continues to face supply shortages, with light vehicle sales down 20% in the past year to September, but other expenditures, such as on home furnishings and clothing, have picked up the slack. Business investment is also on an upswing. While small business confidence plunged in September, this was largely due to uncertainty about the federal election and vaccine passports, suggesting a rebound is likely. The country is now consistently recording merchandise trade surpluses for the first time in several years. We continue to expect stronger 6.0% GDP growth in the fourth quarter and 4.5% in 2022, well above long-run potential of under 2%.
The recent federal election delivered the status quo, with the Liberals maintaining a minority mandate and needing the support of other parties to pass legislation. While some (marginal) further spending is planned, as well as higher taxes on larger financial institutions, this hasn't altered our economic forecast. Wage and rent subsidies could be extended, but less clear is whether income-support programs for workers will continue beyond their scheduled expiration in the month ahead. Still, rising employment, with the household survey now showing net job losses of less than 1% since the pandemic started (amid plunging self-employment), should allay the adverse effects of fading fiscal support on consumer spending.
After spiraling to record highs earlier this year, existing home sales have settled down to above-normal levels. Benchmark prices, which had been decelerating, sped up in August, as new listings are not keeping pace with robust demand. Prices have surged 21% in the past year, near the top of the global charts. A smattering of demand and supply-lifting federal policies will provide some modest support to the market. But rapidly-eroding affordability across the country (though more in Central and Eastern Canada) will eventually cool demand and prices. Until then, correction risks will persist the longer that prices continue to leap-frog income.
Canada's CPI isn't as heated as south of the border, but it's still rising the fastest in 18 years at 4.1%. This is largely due to low base-year effects, as the two-year annualized rate is a more sedate 2.1%. However, surging house prices and producer food costs signal more pressure in the months ahead, before the pace begins to moderate. As in the U.S., the risk is that inflation stays high for longer, especially if wage pressures mount and the increases are passed along to consumers. While worker shortages in Canada are less severe than in the U.S., they are bound to worsen as the jobless rate slides from 7.1% in August to below 6% by late next year.
A cautiously optimistic Bank of Canada is likely teeing up another tapering of asset purchases at the October 27 policy meeting. Still, we expect it to hold off on raising policy rates for one more year to support a full recovery in the labour market. Like the Fed, we now expect a perkier tightening course, with four quarter-point moves in 2023.
Global growth concerns and diminished risk appetite have countered surging natural gas prices (more than double this year) and higher oil prices (7-year peak with OPEC+ sticking to its measured output increases amid rising global demand) to keep the Canadian dollar locked in a range around C$1.26 in the past two months. We still see the loonie strengthening moderately to C$1.20 (US$0.83) by late 2022 as the Bank of Canada lifts policy rates ahead of the Fed.