While Canada’s economy is still expected to enter a technical recession this year, Oxford Economics now believes the downturn will be less severe than initially thought.

In a recent research report, the firm said it expects GDP growth will contract in the second and third quarters before turning positive again in the fourth quarter.

“GDP is now expected to contract 0.5% peak to trough from Q2 to Q3, 0.2 [percentage points] shallower and one quarter shorter than last month’s forecast,” they wrote. “The shallow downturn reflects the enduring impact of mortgage renewals at higher rates on consumers, as well as weakening new homebuilding, muted business investment, and much slower inventory accumulation.”

Oxford said it now expects GDP rose 0.1% in the first quarter, an upward revision from its previous expectation of a 0.1% quarter-over-quarter decline.

“The upward revision largely reflects broad-based strength in domestic demand, including stronger government spending as the 2024 Federal Budget showed little restraint,” they wrote.

The improved economic forecast follows the release of the Bank of Canada’s latest quarterly Market Participants Survey, which showed that most financial experts anticipate a reduced likelihood of an imminent economic downturn.

Based on the median of results, the respondents believe there is a 35% chance of the economy being in recession in the next six months, down from 48% in the previous quarter.

Expectations of a Canadian recession keep being pushed back as the economy continues to perform better than expected by certain metrics, including strong employment growth. Last year, many economists saw the economy slipping into recession by the end of 2023.

But Oxford Economics says consumption is still expected to contract modestly in the second quarter and remain weak throughout the year as consumers are faced with the impact of mortgage renewals at higher interest rates.

“Moreover, muted business capital spending, weaker new housing investment, and a slowdown in inventory accumulation will help push the economy into a modest recession this year,” they said.

Improvements by year-end

However, the economy should start to improve once again by the end of the year, according to Oxford.

“We anticipate a modest recovery will emerge in Q4 as interest rates ease in Canada and abroad, economic sentiment improves, and federal and provincial budget measures support growth,” the Oxford economists noted. “Consumers will slowly start to increase outlays as hiring resumes and real incomes grow, while business investment should pick up with returning demand and stronger profits.”

They add that housing starts should also pick up by the end of the year due to easing mortgage rates and government efforts helping to boost housing supply.

Overall, Oxford expects 2024 GDP growth of 0.1% expansion, which it revised up from its previous forecast of a 0.3% contraction.

“This mainly reflects stronger Q1 GDP growth and a shallower recession due to higher government spending in the 2024 federal and provincial budgets,” Oxford noted. “The Canadian economy is still forecast to grow at a moderate 2% pace in 2025, unchanged from our previous view.”

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Last modified: May 16, 2024