A trio of economy-related questions being asked as the calendar turns to 2023 are, how bad will the potential recession be, by how much will inflation come down, and will the Bank of Canada have to start cutting interest rates?
A recession for an open, medium-sized economy like Canada’s seems unavoidable given that a full 4 percentage points of rate hikes in 2022 hasn’t yet fully taken effect, and as RBC assistant chief economist Cynthia Leach points out—the United States, China, and the European Union, which represent half of the global gross domestic product, are already heading for recession or slow growth in 2023.
However, Leach says that as the recession hits in early 2023, the bar is high for the Bank of Canada to start cutting rates.
“But as the year brings further output losses, unemployment, and easing core inflation, the bank will need to start considering taking the leap late in the year,” she said in a Dec. 8 report.
Worse Recession for Canada?
Tony Stillo, director of Canada Economics at Oxford Economics, says the housing downturn will doom Canada to a worse recession than most of its peers and one that will last for much of 2023.
Canada’s housing market has long featured the toxic combination of highly indebted households and overvalued housing. The Bank of Canada has frequently warned that rising unemployment could lead to major losses in housing markets, and Stillo says prices are forecast to fall 30 percent.
The Canadian Real Estate Association reported that the actual national average sales price fell 12 percent year-over-year in November.
Former RBC CEO Gord Nixon told BNN Bloomberg he’s very negative on real estate, with an additional consideration being that households’ net worth has declined, with house prices coming down combined with a dire year for stocks and bonds.
But the good thing is that economists are saying that given the strength in the labour market, the loss of jobs will be mild compared to prior recessions.
RBC says labour shortages are still a bigger issue than lack of hiring demand. Wage growth was accelerating at 5.6 percent per annum in November.
Pierre Ouimet, head investment strategist at UBS Canada, told BNN Bloomberg on Dec. 23 that a benign recession doesn’t really exist and that the 2023 recession will be longer than what most are expecting due to less ability for the government and central bank to bail out the economy.
“The reason for that is the amount of debt and the ineptitude of governments—basically [they] don’t have any room to manoeuvre to provide any fiscal stimulus. And I don’t think the central banks are going to go back to quantitative easing either,” he said.
Along with raising rates, the BoC is letting government bonds it bought to support federal spending—known as quantitative easing—mature without reinvesting the proceeds in more government bonds. These are uncharted waters for the bank—to avoid a recession while raising short-term rates and exerting upward pressure on longer-term rates.
“Living in a new regime,” Ouimet called it, saying that going back to significantly lower interest rates is a “little bit of a folly.”
