The long-awaited but delayed recession in the Canadian economy is finally here, according to a new report from Oxford Economics.
Highly indebted households and overvalued property prices are the driving factors leading to a decline in consumer spending, which has slowed significantly since the beginning of 2023 – despite strong immigration, strong job growth and the remaining spending spree supported by excessive savings during the pandemic.
The recession was originally expected to begin in the fourth quarter of 2022, but the economy performed significantly better than expected.
“We doubted that economic strength would be sustained earlier this year, and the latest data suggests that a hard landing is indeed imminent,” the report said.
“We expect highly indebted households to reduce spending by reducing and paying down their debt, which should put the majority of the debt service ratio on a downward trend. Rising interest costs will therefore account for the majority of higher debt servicing costs and will likely be even higher than our current forecast when considering the impact of extended repayments for variable rate mortgage holders.”
Due to debt servicing costs, job losses and reduced disposable income, households have already begun to cut back on purchases of new cars, furniture, appliances and services. Household consumption accounts for 60% of Canada’s GDP and will be the main drag on the economy. However, analysts forecast a 1.3% decline in consumer spending during the recession, smaller than declines in previous recessions due to post-pandemic immigration and excess pandemic savings.
The recession began with the GDP decline in the second quarter of 2023 and is expected to end in the first quarter of 2024 with a 1.5% peak-to-trough GDP decline.
Canada’s GDP forecast. (Oxford Economics/Haver Analytics)
The unemployment rate is expected to rise from 5.5% today to 7.2% by mid-2024. This is a relatively limited decline, as it is assumed that employers will prefer to retain their employees by reducing working hours, given the enormous challenges that come with expanding their staffing post-pandemic.
The federal government is not expected to introduce major new stimulus programs as this would increase inflationary pressures and undermine the Bank of Canada’s previous monetary policy of raising the key interest rate to 5%. The federal government also faces the challenge of getting out of the deep red figures in its budget with the aim of achieving balanced balance sheets by 2027/2028.
For the real estate market, Oxford Economics predicts that the real estate correction is far from over.
There was an increase in home resale prices beginning in February 2023, but the correction continued “in full force” over the summer and is expected to continue into 2024 as the recession unfolds. Job and income insecurity combined with higher mortgage rates and record unaffordability will further weaken housing demand and lead to a further decline in home sales.
By mid-2024, home prices will fall another 5% to 10%, resulting in a total 20% to 25% decline in home prices since February 2022 – just before the Bank of Canada’s first rate hike.
Property Price Forecast in Canada. (Oxford Economics/Haver Analytics)
New residential construction has also slowed and is likely to fall further in the wake of the recession.
Housing starts are expected to reach approximately 220,000 units in 2023 and 200,000 in 2024 – well below the average of 270,000 units per year in 2021 and 2022.
But housing construction will pick up in late 2024 and eventually reach a record high of 310,000 housing starts in 2026. By this point the economy will have recovered, mortgage rates will have fallen and government measures to encourage new housing supply – such as the removal of GST from… – such as the cost of building new, secured, purpose-built rental housing – will help to reduce previous compensate for deficits.
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