Canada Headed Toward ‘Moderate,’ ‘Short-Lived’ Recession in 2023, RBC Economists Say

Canada is headed towards a recession in 2023, but it will be short-lived and not as severe as prior downturns, according to a new report from RBC. Economists at RBC said that soaring food and energy prices, rising interest rates and ongoing labour shortages will push the economy into a “moderate contraction” in 2023.

“We see growth slowing into the end of this year, but remaining positive, then we expect two quarters of declining GDP in Q2 and Q3 of 2023,” said RBC economist Nathan Janzen in an interview. “It’s become the more likely base-case assumption.”

Canada will also see unemployment drift slowly higher and then slightly faster into next year, he said. RBC said it expects the unemployment rate to reach 6.6% in 2023, but doesn’t think it will take long to reverse some of that weakness in 2024 and beyond. The unemployment rate dropped to 5.1% in May, the lowest level on record.

“Labour markets will continue to remain pretty firm in the near-term, that’s why we don’t expect a downturn to show up until next year,” Janzen said. “The pace of employment growth will start slowing though, but that’s more about limited supply of labour rather than demand.”

Meanwhile, the pace of wage growth will increase for the rest of this year, Janzen said, as businesses look to fill job vacancies and retain talent, and consumers continue to face high prices.

Household spending that accelerated out of the COVID-19 pandemic lockdowns will slow as higher prices, interest rates and unemployment hit households, the report added.

RBC also expects house prices to fall 10% in the year ahead, subtracting more than $800 billion from household net worth.

RBC said a three-quarters of a percentage point interest rate increase is likely next week, mirroring the U.S. Federal Reserve’s move last month. Janzen said the Bank of Canada will likely hike by a similar amount in September and ultimately sees the central bank pushing its key policy rate to 3.25% by the end of 2022.

“There aren’t a lot of barriers to them being pretty aggressive in the near term,” he said. “It’s less costly to act quickly near-term.” The central bank raised its key interest rate by half a percentage point to 1.50% in June in an effort to get skyrocketing inflation under control.

But Canadian consumers and businesses aren’t expecting much inflation relief anytime soon, based on two surveys the Bank of Canada released recently. Among consumers, short-term inflation expectations increased to 6.8% from 5.1% last quarter, with longer-term inflation expectations rising to 4% from 3.2%. Businesses expect Canada’s inflation rate to still be more than 5% a year from now, and still greater than 4% two years from now.

Source: Globe and Mail
Source: The Star

Recession Coming in Next Year for Canada and the World, More Economists Warn

The drumbeats warning of a coming recession are getting louder and more persistent. The toll taken by the rising cost of living and tightening financial conditions around the globe are prompting more economists to sharply downgrade their outlooks.

Former Treasury Secretary Lawrence Summers told Bloomberg TV that there’s an increasing risk the recession he expects will start sooner, in 2022. “The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago,” Summers told Bloomberg Television. “If the economy did go into recession in the next six to nine months, then you’d probably see a reduction in inflationary pressures.”

The Institute of International Finance, a global association for the financial industry, has been warning of the risks of a global recession for some time, but recently turned up the volume because of disturbing new data. Weeks ago the IIF predicted that Russia’s invasion of Ukraine and China’s COVID lockdowns would cause global growth in 2022 to flatline. “Since we made this forecast, however, it has been U.S. data that have surprised to the downside the most,” IIF economists said in a note. “The rapid slowdown in the U.S. pushes our global growth forecast from near zero into outright contraction.”

Consumer confidence has tumbled as the U.S. housing market enters “deep recession” driven by the steepest rise in real mortgage rates since at least 2010, said IIF.

The risk of global recession has been compounded by weak data out of Europe. Factory orders in Germany have fallen to levels not seen since the 2008 financial crisis, aside from the sharp drop in 2020, while German consumer confidence has sunk below the levels of the initial COVID shock, “which is remarkably bad,” they said.

The biggest question mark in the IIF forecast is China, where much depends on the spread of the omicron virus. But one thing is becoming clear, they said; unlike the first wave of COVID in 2020, the weakness in China’s data in both manufacturing and services looks set to be drawn out. “Whatever happens, China is unlikely to be a source of stimulus as global recession builds,” said the IIF.

Analysts at Nomura Holdings Inc see major economies, including Canada, entering recession over the next 12 months, Bloomberg reports. “Increasing signs that the world economy is entering a synchronized growth slowdown, meaning countries can no longer rely on a rebound in exports for growth, have also prompted us to forecast multiple recessions,” they wrote.

There were signs that Canada’s economy was losing momentum when Statistics Canada released a preliminary estimate that GDP contracted 0.2% in May. This weakness was partly from the temporary effects of oil and gas output that month, but the slowdown also reflects the impact of the decline in Canada’s housing market, said Capital Economics’ Stephen Brown.

Home sales fell 9% in May from the month before, shaving 0.1% off GDP, he said. “With the business surveys for June also showing a loss of broader momentum, the economy may be slowing even sooner than we anticipated,” said Brown.

However, not everyone expects a recession. Deloitte Canada’s chief economist Craig Alexander thinks that a period of stagflation, where growth slows, but inflation stays relatively high, is more likely.

He argues that increased household savings and wealth, and low unemployment, which is likely to stay low as baby boomers age, will give the economy resilience. Deloitte economists put the odds of a slowdown at 60% and the odds of a recession at 40%.

“It’s important to remember that recessions can be psychological events. The self-fulfilling prophecy occurs when everyone expects a recession and acts as if one will occur,” Alexander wrote.

If there is a recession, Canada could be in for a bad one, says Nomura. Canada, Australia and South Korea face the risk of deeper downturns if rising interest rates trigger a housing bust, analysts said. For the U.S., they see a shallow but long recession of five quarters starting from the last quarter of this year, Bloomberg reports.

Source: Financial Post