Canada’s economy is weak and interest rates will be falling soon to help out investments. That was the takeaway from the new Bank of Canada (BoC) Market Participant Survey (MPS). The survey asked representatives from banks, dealers, pensions, insurers, asset management, and research firms about their expectations for the economy in the near-term. The results reveal Canada’s finance community expects low economic growth, and rate cuts in the not-so-distant future.
Canada Is Forecast To See Low GDP Growth, Recession Likely
Canada’s gross domestic product (GDP) is expected to show low-to-negative growth in 2023. Negative growth showed the highest average probability (48.5%) over the next year. Growth between 0% and 1% sees the probability fall significantly (32.8%). It drops off sharply for anything higher.
Bay Street Has Low Expectations For Canada’s Economy
The average probability of Canadian gross domestic product (GDP) growth in 2023.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
Low growth expectations are accompanied by a recession call, as one would expect. The median probability was highest for a recession within 6 to 12 months (50%). Earlier or between 12 to 18 months were both tied (40%), with the second highest probability. The BoC defined recession as two consecutive quarters of negative GDP growth.
Probability of A Recession In Canada
The median market participant response for the probability of when a recession is expected to hit Canada.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
Canadian Interest Rates Are Expected To Fall Starting This Year
A softening economy typically means lower interest rates, and that’s also what market participants see. The first half of the year is now confident that cuts will happen. By September, that’s where they were spit with the median response showing a policy rate of 4.38%. This implies some expect a cut, while others don’t—sending the median forecast slightly lower.
Expectations of falling interest rates become more common shortly afterwards. The median forecast for October (4.25%), shows a full cut is generally expected by that month. December (4.00%) also reveals eroding expectations.
Next year, monetary conditions are expected to ease considerably as the economy slows. The BoC policy rate’s median forecast in the first quarter of 2023 (3.50%) is a full point lower than today. By the end of 2023, expectations fall even further (3.00%). Though few see a return to the rock bottom rates seen during, and since the Global Financial Crisis.
Canadian Interest Rates To Remain Higher Despite Cuts
The neutral rate is the level where the policy rate has no influence on inflation. It’s high enough that it reduces inflation, but low enough that employment remains robust. The median forecast for the long-term neutral rate was 2.50% in the survey. In other words, lower than the current rate but higher than anything seen between 2008 and 2022—so a completely different environment.
Canadian Interest Rates Are Forecast To Fall Starting This Year
The median market participant forecast for the Bank of Canada overnight rate for each meeting in 2023, and quarterly for 2024.
Source: Bank of Canada Market Participant Survey; Better Dwelling.
The BoC Market Participant Survey generally revealed easing market expectations. It’s not great news for a central bank trying to cool inflation. If market participants think rising rates are temporary, they may not cool speculative demand for commodities and housing—keeping inflation lofty. That can require rates to remain elevated for longer, or even require further hikes to break the sentiment.
