The Bank of Canada said this month that it still sees “a path to a soft landing” for the Canadian economy, meaning no 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 a year from now?
A wise man said it is dangerous to make predictions, “especially about the future.”
But here goes.
Housing: Forecasters expect a further drop in housing prices over the next year, by about 14 per in Ontario and B.C., from their February 2022 peak.
That could decrease Canadian household wealth by more than $1 trillion, according to RBC Economics.
That sounds faintly apocalyptic. But that loss represents only a portion of the $2.4 trillion increase in household equity accumulated in the pandemic housing boom.
The house-price swoon hasn’t ended. But at some point next year most of the inflationary excesses will finally have been wrung out of the housing market.
And there is a floor under house prices. It consists of, among other factors, record immigration flows, a low likelihood of overbuilding, and greater affordability due to lower prices.
Economists at Desjardins say that 2023 could see improved housing affordability and a stabilization in the market by late in the year. And that should “lay the groundwork for a more sustainable recovery thereafter.”
Inflation: By this time next year, inflation will be on its way down to the Bank of Canada’s 3 per cent target for the end of 2023, from its June peak of 8.1 per cent. The inflation rate has already slipped to 7.0 per cent in August.
There’s scant reason to doubt the Bank of Canada’s resolve in destroying inflation. By some measures, 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 borrowed money in just six months since March.
The bank will keep raising rates into 2023 and possibly beyond until it sees inflation restored to its normal rate of 2 per cent.
A housing market that is now slumping is draining inflationary pressure from the economy.
So is the decline in gasoline and diesel prices, which could fall more in 2023 with forecasters predicting a lower world oil price in the $70 (U.S.) to $75 (U.S.) range, down from the record $114 (U.S.) in May. That’s due to expected reduced demand caused by anticipated sharp economic slowdowns in Europe and China.
The resulting drop in transportation costs will lower prices for most things next year. But food prices will remain stubbornly high, largely because of diminished crop yields in Western Canada, the Niagara Peninsula, war-ravaged Ukraine, and other major agricultural regions.
Recession: If a coming economic slump next year qualifies as a recession — which is two consecutive quarters of negative GDP growth — it will be among the mildest and briefest recessions on record.
For instance, RBC Economics expects modest negative GDP growth in the middle quarters of 2023, but that the economy will eke out almost 1.0 per cent growth for the year.
And 2024 should see a return to 1.5 per cent to 2.0 per cent GDP growth, normal for a major economy.
Canada is already in an economic slowdown. The first signs of weakness in GDP growth and the job market since the economic recovery began were recorded this summer .
The unemployment rate next year is forecast at about 6.6 per cent, up from the historic low of 5.1 per cent in May. That’s still two per cent lower than the peak joblessness in the most recent major downturn, the Great Recession of 2009-2011.
Sectors most vulnerable to job loss include those tied to housing. These are construction, building materials, renovation supplies, furniture and appliances, and financial services.
But hiring will remain strong amid a skills shortage that will outlast a recession, notably in a short-staffed health-care sector and in tech.
In 2023, employers will continue recruiting experts in robotics, artificial intelligence, and other tech advances that can improve their efficiency and productivity.
And while Americans have begun to spend their pandemic savings, Canadians have yet to tap their estimated $300 billion pandemic cash hoard. “This suggests that Canadian consumers can display more resilience even in the face of higher prices” than their American counterparts, TD Economics says.
We might think of 2023 as a necessary “pause year” after the supercharged economic growth of the 18 months starting last year, which begat today’s 40-year-high rate of inflation.
Others, more cynical, will see a 2023 slowdown as a reckoning for putting so much of our faith in housing as an investment rather than shelter.
But whatever they call this return to normality, meaning sustainable rather than disruptive growth, we’ll take it.
