Canada to enter ‘moderate and short-lived’ recession in 2023, RBC economists warn

A person walks by the Royal Bank of Canada building on Bay Street during the COVID-19 Pandemic in Toronto on Wednesday, May 27, 2020.Nathan Denette/The Canadian Press

The Canadian economy will slip into a “moderate and short-lived” recession in 2023 as it copes with rising interest rates and lofty inflation, Royal Bank of Canada warned on Thursday.

The recession won’t be as severe as previous downturns, but will see consumers pull back on spending as they deal with the strongest price growth in decades, higher costs of borrowing and the loss of wealth, stemming from a slowdown in the housing market, the RBC report said.

Canadians will also be affected by job losses, sending the national unemployment rate – now at a record low of 5.1 per cent – ​​to around 6.6 per cent, the bank estimates.

The Bank of Canada and its global peers are aggressively raising interest rates, aimed at curbing demand and knocking down inflation. Canada’s annual inflation rate hit 7.7 per cent in May, the highest since 1983. The consensus view on Bay Street is that the Bank of Canada will raise its policy rate by three-quarters of a percentage point next week to 2.25 per cent.

As monetary policy tightens, global investors are betting that it results in a recession, which has led to a selloff in stock markets and lower prices for commodities, such as crude oil. RBC is the first of Canada’s major lenders to predict the country will enter a recession in the near term.

In an April forecast, the Bank of Canada said the economy would grow 4.2 per cent this year and 3.2 per cent in 2023, after adjustments for inflation. The central bank will issue a new forecast on Wednesday, alongside its rate decision. Private-sector forecasters have been penciling in slower rates of growth as the inflation threat lingers.

“When you’re at the top of the hill the only way to go is down. Canada’s economic growth has fired on all cylinders following pandemic shutdowns,” wrote RBC economists Nathan Janzen and Claire Fan in their report. “But a historic labor squeeze, soaring food and energy prices and rising interest rates are now closing in. Those pressures will likely push the economy into a moderate contraction in 2023.”

The authors noted that higher interest rates were “necessary to tame inflation” and that a downturn “can be reversed once inflation settles enough for central banks to lower rates” again.

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