The Canadian economy was surprisingly resilient in the first quarter of 2023 after a disappointing end to 2022. Helped by a mild winter and better economic conditions in the U.S. at the start of the new year, first-quarter economic data seems to be coming in better than we expected. We now expect a 0.4% annualized gain in real GDP for the first quarter (was down 0.9% in our November forecast).

However, some weakness is likely heading into the second quarter. S&P Global Ratings Economics expects Canadian economic activity to dip 0.6% in the second quarter on continued declines in housing, a slowdown in consumer spending, and weakening exports as the U.S. falls into recession. For the year, however, we expect a 0.8% increase in real GDP as Canada likely avoids recession.

Since our September forecast, we have expected the U.S. to fall into a shallow recession in 2023. We now expect U.S. GDP to decline by 0.3 percentage point between its peak in first-quarter 2023 and its third-quarter trough. If this prediction proves correct, this recession will beat the 2001 recession as the softest since 1960.

Although safeguards from the Federal Reserve and other regulators have stabilized conditions, banking concerns increase the risks of a worse outcome. We developed these forecasts during a period of high market volatility and significant policy changes, and they therefore have wider-than-normal confidence bands. Forecasting began before the failure of Silicon Valley Bank.

Canadian economic growth stalled in fourth-quarter 2022 for the first time since the pandemic-led contraction in second-quarter 2021. A slowdown in inventory accumulation and continued weakness in housing and business investment led to the flat GDP growth.