The Bank of Canada said this month that it still sees “a path to a soft landing” for the Canadian economy, that is, without a recession.
But RBC Economics, Desjardins Group and Oxford Economics, among others, expect a recession next year.
So it’s worth asking how long and punishing a 2023 downturn would be. What will the Canadian economy look like in a year?
A wise man once said that it is dangerous to make predictions, “especially about the future”.
Lodging: Forecasters expect house prices to decline further over the next year, by about 14% in Ontario and British Columbia, from their peak in February 2022.
This could reduce the wealth of Canadian households by more than $1 trillion, according to RBC Economics.
It feels slightly apocalyptic. But that loss is only part of the $2.4 trillion increase in household equity accumulated during the pandemic housing boom.
The slump in real estate prices is not over. But at some point next year, most inflationary excesses will finally have been squeezed out of the housing market.
And there is a floor under real estate prices. It consists of, among other factors, record immigration flows, a low likelihood of overbuilding, and greater affordability due to lower prices.
Desjardins economists say 2023 could see an improvement in housing affordability and a stabilization of the market by the end of the year. And that should “lay the groundwork for a more sustainable recovery going forward.”
Inflation: By this time next year, inflation will be on track to ease back towards the Bank of Canada’s 3% target for the end of 2023, after peaking at 8.1% in June. The inflation rate has already slipped to 7.0% in August.
There is little reason to doubt the Bank of Canada’s determination to destroy inflation. By some metrics, the bank is waging the most aggressive fight against inflation among its central bank peers, having imposed a 13-fold increase in the cost of borrowing money in just six months since March.
The bank will continue to raise rates until 2023 and possibly beyond until inflation returns to its normal rate of 2%.
A now collapsing housing market is draining inflationary pressures from the economy.
The same goes for lower gasoline and diesel prices, which could fall further in 2023, with forecasters expecting the global price of oil to fall into the $70 (US) to $75 (US) range. , down from a record high of $114 (US) in May. This is due to the expected decline in demand caused by the sharp economic slowdowns expected in Europe and China.
The resulting drop in transportation costs will drive down the prices of most things next year. But food prices will remain stubbornly high, largely due to declining crop yields in Western Canada, the Niagara Peninsula, war-ravaged Ukraine and other major agricultural regions.
Recession: If an economic crisis coming next year qualifies as a recession – meaning two consecutive quarters of negative GDP growth – it will be one of the mildest and shortest recessions on record.
For example, RBC Economics expects modest negative GDP growth in mid-2023, but that the economy will post growth of nearly 1.0% for the year.
And 2024 should see a return to GDP growth of 1.5% to 2.0%, which is normal for a large economy.
Canada is already experiencing an economic downturn. The first signs of weakness in GDP growth and the labor market since the start of the economic recovery were recorded this summer .
Next year’s unemployment rate is expected to be around 6.6%, up from the all-time low of 5.1% recorded in May. That’s still two percent lower than the unemployment peak of the most recent major recession, the Great Recession of 2009-2011.
The sectors most vulnerable to job loss are those related to housing. These are construction, building materials, home improvement supplies, furniture and appliances, and financial services.
But hiring will remain strong amid a skills shortage that will survive a recession, especially in a short-staffed healthcare sector and in technology.
In 2023, employers will continue to recruit experts in robotics, artificial intelligence and other technological advancements that can improve their efficiency and productivity.
And while Americans have begun to spend their pandemic savings, Canadians have yet to dip into their estimated $300 billion cash reserve. “This suggests Canadian consumers may be more resilient even in the face of higher prices” than their US counterparts, TD Economics said.
We could see 2023 as a much-needed “year of pause” after the 18-month booming economic growth that began last year resulted in the current inflation rate, the highest in 40 years.
Others, more cynical, will see a 2023 downturn as a reckoning for putting so much faith in housing as an investment rather than shelter.
But whatever they call this return to normality, that is, sustainable rather than disruptive growth, we will accept it.