What the Stock Market Indicates Regarding Canada’s Future Economic Growth

Canada’s economy persistently struggled with a high inflation rate throughout 2022. In response, the Bank of Canada forcefully increased the country’s target rate by 25 basis points from March 2022 to January 2023. The increase gave the investors the perception of slow economic growth in the country, as evidenced by the reduction of earnings forecasts for businesses trading stocks on the TSX.

The drop in earnings forecasts for publicly traded companies gave policymakers an early sign that high interest rates would be effective and reduce economic growth. However, the anticipation of an economic slowdown due to aggressive interest rate hikes and a possible inflation plateau has some experts projecting a rebound in the TSX index in the second half of 2023.

Canada’s economy and the stock market

With a tighter monetary policy and slower economic growth plaguing Canada’s economy, 2023 began with more volatility than 2019. However, market experts believe the country’s economy will grow stronger in the second half of the year, aided by the upswing in the financial, energy, and industrial sectors.

According to experts, Canadian stocks in the financial, industrial, and energy sectors are best positioned to bounce back from a possible upcoming recession. Looking at the top 60 stocks in the TSX, 13 are energy stocks (21.67%), followed by materials and financial stocks (10 stocks each). That shows that over 50% of the TSX index is dominated by the three sectors.

In the energy sector, for instance, ENB Enbridge, SU Suncor Energy, and TRP TC Energy are up by 15.98%, 8.38%, and 7.14% respectively. However, while energy stocks are performing considerably better than other sectors, many investors are shifting their focus to other growing sectors like entertainment and casino gaming.

Indeed, Canada’s gambling market is expected to hit 15 billion in 2023, as the top casino stocks have grown by over 80% since 2019. While these stocks weren’t immune to 2021’s economic devastation, companies like the Great Canadian Gaming Corp are bouncing back to pre-pandemic levels. The company owns several casino establishments across Canada and despite competition from operators offering lucrative online casino bonuses, the company’s revenue is up by 15% this year.

Is Canada’s economy losing its momentum?

Following a year of volatility, Canada’s economy has been surprisingly resilient as tight labor markets, strong population growth, and high commodity prices have helped to sustain economic growth. That has created room for economic calmness heading into the fourth quarter. Additionally, signs of slowing growth have emerged on multiple fronts, including the stock market.

According to the OECD, Canada’s economy rose by 3.2% in 2022. That was slightly higher than the 2.8% average that was previously predicted. However, the country is still facing lingering structural issues guided by weak investments, inflationary pressure, and tepid productivity growth. Additionally, Canada’s households are facing ongoing medium and short-term economic challenges keeping up with the growing cost of living.

Based on the available data, experts project that Canada’s economic growth will be 1.5% in 2024 and 1.3% in 2023. These figures are slightly lower than the predicted G20 averages (2.7% for 2024 and 2.2% for 2023). Additionally, the Bank of Canada predicts a potential economic downturn in 2023, considering that the pandemic negatively impacted the country’s fiscal balance.