RBC reports that Canda will fall into a recession 2023

RBC Is First Bank to Predict Canada Headed For Recession in 2023

Economy to contract by annualized 0.5% pace in middle of year

‘Inflation has been too strong for too long’: economists

 

By Randy Thanthong-Knight

July 7, 2022 at 7:33 AM EDTUpdated onJuly 7, 2022 at 11:54 AM EDT

 

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Royal Bank of Canada became the first of the country’s major banks to predict the nation’s economy will fall into a recession next year amid four-decade high inflation, historic labor shortages and aggressive interest-rate hikes.

 

In a new set of projections released on Thursday, Canada’s largest bank said it expects back-to-back quarters of negative growth in 2023, a situation economists refer to as a technical recession.

 

 

The recession call illustrates the extent to which Canada’s resource-heavy economy -- which has been benefiting from the recent boom in energy prices -- remains vulnerable to global economic headwinds and higher borrowing costs that threaten to stall expansions in most major advanced economies.

 

Canada’s central bank will need to continue hiking into the slowdown to temper inflation expectations threatening to entrench price pressures, RBC said.

 

“Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act,” according to the report, which was written by economists Nathan Janzen and Claire Fan. “Inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations.”

 

 

Earlier this week, the central bank’s quarterly surveys of executives and consumers showed inflation expectations over the next couple of years have hit a record in Canada: 78% of businesses expect the consumer price index to exceed 3% over next two years.

 

Still, the recession in Canada will likely be moderate and short-lived by historical standards and will be reversed once inflation settles enough for central banks to lower rates, RBC said.

 

The Canadian economy is expected to contract by an annualized 0.5% pace in the second and third quarters of 2023, according to the new forecasts. Growth will average 0.8% next year, down from 3.7% this year.

 

As the economic contraction plays out in 2023, Canada’s unemployment rate will likely rise about 1.5 percentage points to 6.6%, they said, adding that it wouldn’t take long to unwind that weakness in 2024 and beyond.

 

Toronto Office Vacancies Rise to a Record on Recession Fears

 

Royal Bank projects the Bank of Canada will increase its benchmark policy rate to 3.25% by the end of this year, from 1.5% right now. The central bank is widely expected to hike the overnight rate by three quarters of a percentage point at its next decision on July 13.

 

RBC cited a number of headwinds facing the nation’s economy.

 

While Canadians continue to fuel a recovery in the travel and hospitality sectors and higher commodity prices have boosted the mining and energy industries, RBC said soaring prices are cutting into households’ purchasing power. The housiing market, meanwhile, is sliding in some regions with prices in Toronto down 11% in four months.

 

 

Canada will also feel the spillover from slowing global growth. The US unemployment rate is expected to climb and emerging markets will struggle with higher food and energy prices and borrowing costs, acting as a drag on Canadian exports.

 

Even without rate hikes, labor shortages would be hampering Canada’s economy as businesses struggle to find workers to grow, Fan and Janzen said.

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