Jul 7, 2022
RBC predicts Canada heading for recession in 2023
, BNN Bloomberg
RBC predicts recession for Canada
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Royal Bank of Canada is predicting this country will likely endure a "moderate and short-lived" recession next year as the economy succumbs to the pressure brought on by stubborn inflation, higher rates, and constraints in the labour market.
"This recession will be moderate and short-lived by historical standards—and can be reversed once inflation settles enough for central banks to lower rates," economists Nathan Janzen and Claire Fan wrote in their report Thursday.
RBC’s outlook includes back-to-back annualized contractions of half a percentage point in the middle quarters of next year, before returning to growth of 0.2 per cent in the fourth quarter of 2023.
Nonetheless, Janzen and Fan warned the Bank of Canada can't afford to take its foot off the gas in the fight against inflation.
"Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act. ... A scenario in which Canadians believe inflation will run well past the bank’s target range of one to three per cent could upend almost three decades of exceptionally effective inflation targeting policy. It could also require much larger and more damaging interest rate hikes to re-anchor prices," they wrote.
The Bank of Canada is widely expected to hike its target for the overnight interest rate to 2.25 per cent from 1.5 per cent at its policy meeting next week. That would be the fourth time the rate has gone up this year as the central bank attempts to wrestle down inflation that is sitting at close to a 40-year high of 7.7 per cent. RBC is expecting the consumer price index will rise at least 5.0 per cent through the first quarter of 2023, and will eventually slide back into the Bank of Canada’s target range of one to three per cent in the third quarter of next year, but without quite reaching the goal of 2.0 per cent.
While a recession appears to be in the offing, RBC's economists said they expect the unemployment rate will only rise modestly compared to past downturns as businesses are already struggling amid a "historic labour squeeze."
That squeeze was evident earlier this week in the Bank of Canada's latest Business Outlook Survey, which showed four out of every ten respondents said their company was facing a labour shortage, and 68 per cent said the tight labour conditions were worse than a year earlier. Those dynamics are compelling employers to pay up more for talent: 73 per cent of respondents said they're expecting to pay higher wages over the next year, with an average pay hike of 5.8 per cent.
With unemployment sitting at a record low of 5.1 per cent as of May, RBC is estimating the rate will rise to 6.6 per cent next year as the economic downturn plays out. That rise of one-and-a-half percentage points would be small by historical standards: RBC looked at past recessions as found the unemployment rate rose as little as 0.6 per cent (in 1951-53) to as much as a seven-point surge in 2019-20).
"This recession will be moderate and short-lived by historical standards—and can be reversed once inflation settles enough for central banks to lower rates," economists Nathan Janzen and Claire Fan wrote in their report Thursday.
RBC’s outlook includes back-to-back annualized contractions of half a percentage point in the middle quarters of next year, before returning to growth of 0.2 per cent in the fourth quarter of 2023.
Nonetheless, Janzen and Fan warned the Bank of Canada can't afford to take its foot off the gas in the fight against inflation.
"Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act. ... A scenario in which Canadians believe inflation will run well past the bank’s target range of one to three per cent could upend almost three decades of exceptionally effective inflation targeting policy. It could also require much larger and more damaging interest rate hikes to re-anchor prices," they wrote.
The Bank of Canada is widely expected to hike its target for the overnight interest rate to 2.25 per cent from 1.5 per cent at its policy meeting next week. That would be the fourth time the rate has gone up this year as the central bank attempts to wrestle down inflation that is sitting at close to a 40-year high of 7.7 per cent. RBC is expecting the consumer price index will rise at least 5.0 per cent through the first quarter of 2023, and will eventually slide back into the Bank of Canada’s target range of one to three per cent in the third quarter of next year, but without quite reaching the goal of 2.0 per cent.
While a recession appears to be in the offing, RBC's economists said they expect the unemployment rate will only rise modestly compared to past downturns as businesses are already struggling amid a "historic labour squeeze."
That squeeze was evident earlier this week in the Bank of Canada's latest Business Outlook Survey, which showed four out of every ten respondents said their company was facing a labour shortage, and 68 per cent said the tight labour conditions were worse than a year earlier. Those dynamics are compelling employers to pay up more for talent: 73 per cent of respondents said they're expecting to pay higher wages over the next year, with an average pay hike of 5.8 per cent.
With unemployment sitting at a record low of 5.1 per cent as of May, RBC is estimating the rate will rise to 6.6 per cent next year as the economic downturn plays out. That rise of one-and-a-half percentage points would be small by historical standards: RBC looked at past recessions as found the unemployment rate rose as little as 0.6 per cent (in 1951-53) to as much as a seven-point surge in 2019-20).
