Rapidly rising interest rates and other economic headwinds mean it’s becoming increasingly likely Canada will enter into a recession.
That’s the prediction from RBC senior economist Joshua Nye, who noted, “With a soft landing becoming more challenging, our base case assumes mild recessions in most of the economies we track.”
Nye noted that the Canadian economy had sustained good momentum up until May GDP posted a 0.2% decline. Thanks to that previous momentum, Nye predicts a “solid” 4.5% increase in second-quarter GDP, along with “decent growth” over the summer thanks to recovering travel and tourism demand, alongside commodity sectors getting a boost from higher global prices.
“But we think that momentum will be difficult to sustain as 2022 comes to a close,” he wrote, pointing to a softening in housing demand and declining real estate prices that will “begin to reverse some of the wealth build-up seen during the pandemic.”
Add to that rising inflation that’s eating away at purchasing power and consumer confidence falling to 2020 levels.
“We see these headwinds extending into 2023, and the impact of rising debt servicing costs on Canada’s highly indebted household sector will only continue to build next year,” Nye said, adding that a softer global growth backdrop will also weigh on the Canadian economy.
“In this environment, we think it will be difficult for Canada to avoid a downturn of its own and we now look for GDP to decline in the middle quarters of next year, limiting annual growth to less than 1% in 2023,” Nye said.
The unemployment rate is also forecast to rise by 1.5 percentage points from its historically low rate of 5.1%.
Canadian recession to be “moderate and short-lived”
Another RBC report came to the same conclusion, and suggested that any forthcoming recession should be “moderate and short-lived by historical standards.”
RBC economists Nathan Janzen and Claire Fan added that such a recession could be “reversed once inflation settles enough for central banks to lower rates.”
“Prices are still rising too fast and inflation won’t slow sustainably until demand falls,” they said. “But once that happens, central banks will ease interest rates again.”
For what it’s worth, CIBC Capital Markets thinks rate cuts could be coming sometime after 2023.
Rate analyst Rob McLister of MortgageLogic.news noted that fears of a recession are already helping to drive up credit spreads, which impact lender funding costs. “The more that credit spreads inflate, the more that mortgage discounts will shrink, especially on new variable-rate mortgages,” he told CMT.
“Rates are caught in a tug of war between investors who fear persistent inflation and investors who expect a recession,” he added. “The former have the upper hand today, but the latter will ultimately win. And when they do, they’ll pull mortgage rates back down. It’s only a question of how long that takes and how high rates climb in the meantime.”