The Canadian economy will enter a technical recession in the first half of 2023, according to Jean-François Perrault, chief economist and senior vice-president at Scotiabank Economics.

“Lower commodity prices, elevated uncertainty, lower equity values, and a weaker U.S. are all acting as brakes on growth,” he said in a note to clients on Monday.

“We expect growth to slow from 3.2 per cent in 2022 to 0.6 per cent next year and for the economy to enter a technical recession in the first half of 2023.”

Perrault added that his team now believes the “Bank of Canada will now need to raise its policy rate to 4.25 per cent by the end of the year.”

“This change in view on our policy rate forecast—our last forecast expected the policy rate to peak at 3.75 per cent—reflects in equal measure the fiscal support measures being rolled out domestically, as well as the impact of a rapidly depreciating Canadian dollar,” he said.

“Both developments will put upward pressure on inflation, though we take comfort from the fact that there are some signs that inflation is moderating in Canada, in contrast to the U.S.”

The Bank of Canada’s benchmark interest rate currently stands at 3.25 per cent.

The central bank has two more policy rate announcements before the end of 2022, with the next decision scheduled for next week on Oct. 26.

Earlier this month, Bank of Canada Governor Tiff Macklem reiterated his commitment to getting inflation under control.

“There was a broad consensus that inflation remains the most immediate threat to current and future prosperity,” Macklem said to reporters on Oct. 14.

He added that “there was concern that the longer inflation remained high, the bigger was the risk that high inflation becomes entrenched.”

 

U.S. FED COULD TRIGGER RECESSION

South of the border, Perrault thinks the U.S. Federal Reserve will “trigger a mild recession.”

“In the United States, we now believe the Federal Reserve will need to hike its policy rate to five per cent by early 2023. This is 150 basis points more than our last forecast,” he said.

Perrault added that the U.S. central bank has indicated through its dot plots that it plans to hike rates to 4.5 per cent by the end of the year.

“While we normally don’t pay too much attention to dot plots, the fact that the Fed is communicating a need for such a tightening in just under three months gives them very little room to not follow through on this guidance,” he said.

“This additional tightening and a substantial decline in equity markets (impacting household wealth) are enough to trigger a recession.”