The Royal Bank of Canada (RBC) has changed its forecast, predicting an upcoming recession will arrive sooner than expected.
While some say it will be mild and others say it will be full-blown, many economists say that a recession—which is usually defined as two quarterly periods of negative economic growth—is on the horizon for 2023.
RBC changed its forecast to a recession in the first quarter of 2023 rather than the second quarter. “What happens next will depend on a range of factors, with interest rate increases the most significant among them,” the forecast said.
“Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably,” it added.
RBC predicts the Bank of Canada will stop raising its interest rates by the end of 2022 and the U.S. Federal Reserve in early 2023 as long as inflation settles down. But if inflation remains high, interest rates may continue to climb and the recession will be more severe.
With lots of job openings and a scarcity of workers, a spike in unemployment that would usually be seen during a recession is unlikely, but RBC predicts that there will be longer job search times and some employers will cut back on hours given to employees.
Average Households to Shave $3,000 Off Purchasing Power
“Rising inflation and higher borrowing and debt servicing costs are expected to shave almost $3,000 from average purchasing power in 2023. And while drum-tight job markets have pushed wages higher, it hasn’t been enough to offset these losses. This will weigh most heavily on Canadians at the lower end of the wealth spectrum, particularly those whose disposable income has faded alongside pandemic support,” the RBC report said.It said the Canadian manufacturing sector will feel the brunt of the recession, with purchasers here and in the United States cutting back spending on manufactured goods.
“While they won’t escape unscathed, the travel and hospitality sectors—among the hardest hit by COVID-19 restrictions—could be more resilient than in past downturns,” the forecast added.
Due to two years of travel restrictions, people are yearning for travel. And with employment in accommodation and food services still operating at 15 percent below its pre-pandemic capacity—three times lower than the average decline in recessions—it is not likely that these businesses will resort to layoffs, RBC says.
PBO Forecasts Slowdown, But No Recession
Parliamentary Budget Officer Yves Giroux said in interviews with CTV and CBC that economic growth will slow due to rising interest rates but he does not believe there will be a full-on recession.“Barring any unforeseen economic shock on the world stage … or central banks around the world to overshoot in increasing interest rates more than what we expect to be necessary, we don’t see an economic contraction,” Giroux said on CBC’s Power and Politics. “Economic growth [will happen] at a slower pace, but [there will be] no outright recession.”
Giroux said to watch central bank interest rates, which he predicts will not get much higher than 4 percent in 2023 and will decline after that, the same time frame RBC predicted they would fall.
