Five things to watch for in Canadian business in 2024

Business headlines in 2023 saw a housing crisis and the fight against inflation take centre stage, while the job market proved to be stronger than expected.

Housing and the cost of living will likely remain at the forefront in 2024, as will central banks. Economists expect a shift in gears to interest rate cuts as the economy softens further.

Here are five things to watch in Canadian business in 2024 as households and companies work through what is expected to be a challenging economic environment.

Inflation and interest rates

The inflation rate is well off its 2022 highs, but it still hasn’t returned to the Bank of Canada’s target of 2%.

The central bank’s key interest rate has been unchanged at 5% since July. Inflation fluctuated somewhat in the latter half of the year, but came in at an annualized rate of 3.1% in November for the second month in a row.

Economists expect inflation to continue slowing, but the Bank of Canada has continued to emphasize that it’s prepared to raise rates again if necessary.

CIBC deputy chief economist Benjamin Tal said inflation was expected to cool in 2023, but the cost of services has proved to be “stickier” than predicted. For 2024, he said higher interest rates will take their toll.

“We have a tug of war between a slowing economy and inflation, and I think that in this tug of war, the slowing economy will win,” Tal said.

That should put the Bank of Canada in a better position to start cutting interest rates in 2024.

However, Tal expects the central bank to keep people guessing right up to the last minute.

“I think that deep inside, they know that they’re not going to raise interest rates again, but they’re not going to tell you that,” Tal said.

Markets

The S&P/TSX composite is on track to post a gain for 2023 after a rally that began in late October. The market gathered steam after U.S. Federal Reserve chair Jerome Powell left traders banking on rate cuts in 2024.

Invesco chief global market strategist Kristina Hooper said 2023 was a bumpy and volatile year, but it is going to end on a high note.

“What we’ve seen is a growing recognition by markets that the disinflationary process is well underway and that we are likely to avoid any kind of significant, broad-based recession,” she said.

But Hooper said we are going to see a slowdown over the next six months as interest rates weigh before things pick up in the back half of the year. With that in mind, she’s watching cyclical sectors such as consumer discretionary, materials and industrials.

“But I have to also give the caveat that I think there’s a lot of potential in technology. I think technology will benefit from the easing in rates,” she said.

Lori Norman, investor specialist at Steadyhand Investment Funds Inc., says we are likely headed into a more normalized interest rate environment in 2024. And while the Bank of Canada might cut rates next year, she warned the days of near-zero interest rates are not coming back.

Housing

The spring real estate market will be one to watch this year as observers hope to gauge buyers’ intentions.

Canada’s housing market cooled in 2023 due in part to higher mortgage rates, but demand stayed strong as the population grew. Politicians at all levels of government are facing pressure to do something about the cost of housing.

A report by RBC assistant chief economist Robert Hogue and research associate Ben Richardson expects governments to address the supply gap and reduce obstacles in the way of new housing, while lower interest rates in the second half of the year will help improve affordability, but not by much.

“The extremely high bar to home ownership across many parts of the country will put rental options in the spotlight,” Hogue and Richardson wrote.

“We expect more rental supply coming to market in the year ahead in response to high rents and various incentives to prop up construction.”

Still, they said it likely won’t be enough.

In its forecast for this year, the Canadian Real Estate Association said it expected home sales to fall 9.8% compared with 2022, then rebound by 9% in 2024 as interest rates eventually trend down.

The national average home price is forecast to gain 1.5% from 2023 to 2024, coming in at $690,916.

Energy sector

The expanded Trans Mountain pipeline was expected to start shipping crude oil in the new year, but the long-awaited project ended 2023 facing the possibility of further delays after a regulatory setback.

Trans Mountain is expected to boost export capacity for Canadian oil, but comes as the work to limit climate change and foster the transition to cleaner energy sources ramps up. Wildfires across Canada in the summer of 2023, followed by a mild December in much of the country, underscored the consequences of climate change.

Ottawa is expected to publish draft regulations by mid-2024 for its proposed national cap-and-trade system for greenhouse gas pollution, with the final regulations expected in 2025. A draft framework released this month would see the oil and gas industry cut emissions by more than one-third by 2030 or buy offset credits.

Oil prices hovered around US$70 a barrel as 2023 drew to a close, even as sanctions continued on Russia’s oil because of its ongoing war in Ukraine and the Israel-Hamas war threatened stability in the Middle East.

Invesco’s Hooper noted that oil prices were well off the highs they hit in 2022 when oil traded for more than US$100 a barrel.

“It’s very hard to divine exactly where oil prices go because there are so many different factors at play,” she said.

Artificial intelligence

ChatGPT debuted in late 2022 and grew in popularity in 2023 as people experimented with generative artificial intelligence, getting a glimpse of its potential uses for work and play.

Terri Griffith, a professor at Simon Fraser University’s Beedie School of Business, said we are still in the early adoption phase of AI while companies and individuals wrap their heads around the technology.

“Some organizations are saying, ‘Don’t you dare use these tools.’ Other organizations are saying, ‘How can we use these tools, how can we build our own to be customized for us?’ But it’s such early stages that there’s a huge amount of uncertainty,” said Griffith, who holds the Keith Beedie chair in innovation and entrepreneurship.

AI systems such as ChatGPT aren’t without pitfalls. Cybersecurity officials have urged technology firms to ensure there are safeguards to prevent AI systems from being misused.

Griffith said there is an opportunity for the technology to help solve some real problems, and workers should focus on its potential outcomes for their jobs.

She said the personal computer took years to transform business, but that won’t be the case when it comes to AI.

“This is a much faster rollout of a huge shift and it’s incumbent on all of us to help pull everybody along,” she said.