growth in challenging times / xijia

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.

RBC economists said Thursday that soaring food and energy prices, rising interest rates and ongoing labour shortages will push the¬†economy¬†into a “moderate contraction” next year.

“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 this year.

“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 Monday.

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.

The Bank of Canada’s next interest rate announcement is scheduled for July 13, and Statistics Canada is set to release jobs number for June on Friday.