Canada’s overstimulated economy is experiencing withdrawal from the end of low rates. Oxford Economics‘ warned investors the country is already in recession. It’s expected to spend most of 2023 in recession, and will be hit harder than its G7 peers. Highly indebted households and overpriced real estate shouldn’t expect much relief either. Elevated inflation will limit stimulus and prevent cuts to interest rates in 2023.
Canada Is Already In A Recession, To Be Worse Than G7 Peers Due To Debt & Housing
Canada is expected to see a moderate recession, and it’s already kicked off, says the firm. They forecast real gross domestic product (GDP) will contract 1.3% in 2023, below consensus. Recession is expected throughout next year, with real GDP falling 2.3% from Q4 2022 to Q3 2023. It might not sound like much, but keep in mind that’s after a substantial inflation adjustment.
Canada’s Consumers and Housing Will Drive A Recession
Canadian gross domestic product (GDP) historic and forecast, showing households will drive the upcoming recession.
Source: Oxford Economics.
High inflation and aggressive monetary tightening required to cool it, are the causes. Lower household spending, and a real estate slump provide additional pressure lower. More leverage means amplified gains in a bull market, and amplified losses in a downturn.
“Prevailing household debt and housing imbalances will mix with pandemic and geopolitical forces to make Canada’s recession deeper than most advanced economies,” said Tony Stillo, OxEcon’s director of economics.
Canada’s “Overvalued” Housing & Highly Indebted Households To Be Hit Hardest
Canada’s overvalued housing and highly indebted borrowers will see the biggest hit. Stillo’s firm has previously called a 30% drop for home prices from peak-to-trough. He warns prices will continue to fall through mid-2023. In addition to a negative wealth effect that will cool spending, it’s also less leverage.
Canadian Real Estate Prices and Residential Investment Forecast
Source: Oxford Economics; Haver Analytics.
Higher debt service costs and lower real incomes will also squeeze household budgets. This will prompt deleveraging, according to Stillo. That can complicate Canada’s housing market further, since many mom & pop investors leveraged their existing home and helped drive excess demand. They’ll have to sit the next leg of this market out, potentially facing losses themselves.
Employment is a wildcard that can work in either direction. The firm acknowledges a tight labor market, and sees robust immigration helping. That’s expected to soften the blow Canada might otherwise expect during a recession. Still, the unemployment rate is seen climbing nearly 3 points to 8.1% next year. That’s roughly 1 in 13 working adults ready and able, unable to find a job. A robust immigration inflow at this time can also make this worse.
Like they said—it’s a wildcard.
Canadian Interest Rates Won’t See Any Cuts In 2023
High inflation will limit Canada’s ability to respond like many likely expect. The firm’s forecast sees inflation coming down, but remaining above the 2 point target. Falling energy & commodity prices, and lower home prices are amongst the factors working to bring inflation down. However, due to inflation remaining elevated, they don’t see any interest rate cuts.
“We expect the BoC to keep the policy rate at 4.25% through 2023 as it assesses the economy and inflation,” says Stillo. Adding, “The BoC is unlikely to begin lowering the policy rate to a neutral setting until 2024—once it’s convinced that inflation is on a sustainable path back to the 2% target.”
Stillo isn’t alone in this call. BMO recently reiterated their recession expectations, also seeing no interest rate cut. Inflation is just too high to expect a cut, and they see the central bank erring on the side of too tight until then. Cutting too early risks re-igniting inflation, causing a 70s/80s-style inflation spiral. No central bank wants that.
