Canadian consumers will feel less affluent as home prices continue to fall and higher debt payments put a greater strain on disposable income, says RBC Economics. THE CANADIAN PRESS/Tijana Martin
Canada’s economy started the year stronger than many expected, according to a report by RBC Economics, but that doesn’t mean a slowdown isn’t expected in the coming months.
“Economic growth has been more resilient than feared after last year’s aggressive rate hikes,” said the report’s authors, led by RBC chief economist Craig Wright.
“Nevertheless, interest rates affect the economy with a significant lag – and often with unintended consequences.”
The most likely scenario remains that the US and Canadian economies will both enter mild recession during the mid-quarter of 2023RBC economy
The impact of higher borrowing costs has been fully evident in interest rate-sensitive sectors such as real estate, but it has yet to fully weigh on consumer spending.
Additionally, the tight labor market, China’s easing of strict pandemic restrictions and strong growth in the US economy have helped boost Canada’s growth.
The Bank of Canada has suspended rate hikes for the time being, but the longer rates stay high, the more “pain is coming,” the report said.
“Higher interest rates will continue to reduce household purchasing power with a lag. Housing markets have continued to retreat both in Canada and abroad. The global manufacturing outlook has clouded over and mitigated by supply chain disruptions and lower (though still high) commodity prices are helping to curb inflation,” it said.
“Against this backdrop, the most likely scenario is still that the US and Canadian economies will enter mild recession during the mid-quarter of 2023.”
RBC also warns that Canadians will feel less wealthy as house prices fall and higher debt payments eat away at disposable income, prompting them to rein in spending later this year.
Road ahead probably bumpy
The kind of economic landing Canada experiences will depend on how stubborn inflation is and how much the central bank has to step up its fight to bring inflation down from now on, the report said.
The story goes on
In January, Canadian inflation fell to 5.9 percent year-on-year, but is still about three times the Bank of Canada’s target.
RBC’s base case expectation is a “slight” slowdown but says there is a chance that fiscal spending and the labor market will remain resilient in the near term, leading to potential for further rate hikes.
“And the alternative to the relatively mild, bumpy economic downturn we expect in 2023 could still look more like a crash landing, with much higher interest rates and a larger slowdown in economic activity required to bring inflation back under full control control,” the report says.
Recovery in late 2023
After mid-year weakness, expected population surge as the federal government ramps up immigration could push the economy back into growth mode, RBC says.
“An immigration-driven surge in post-pandemic population growth will help fill some current gaps in labor markets and add nearly one million consumers to Canada’s population in 2023 and 2024,” the report said.
“This boost to the economy’s production (and consumption) potential will help underpin economic growth with GDP growth to resume positive but modest growth.”
Michelle Zadikian is Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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