Canada is headed for a moderate recession, but the economic contraction is expected to be short-lived compared to previous recessions, Royal Bank of Canada economists predict.
The Bank of Canada has been aggressively raising its key overnight rate this year to combat skyrocketing inflation, which rose to 7.7 percent in May, the fastest rise in nearly four decades and well above expectations. of the economists.
With the central bank sticking to its 2 percent target, more aggressive moves are expected this month and beyond to bring inflation down to 5.7 percent. Economists forecast a 75 basis point increase in July, mirroring the US Federal Reserve’s move in June, and another 50 in September, a A Reuters poll suggests.
The forceful strategy, in step with the US Federal Reserve, has raised concerns that Canada is headed for a recession, with high borrowing costs leaving Canadian households with too much debt particularly vulnerable. Experts say that the lowest income groups have the greatest exposure to the dual risks of inflation and rising interest rates.
According to economists, much of the inflationary pressures are coming from outside Canada, with energy and food prices soaring due to supply chain bottlenecks due in part to the Russian invasion of Ukraine.
“Canada’s economic growth has gone into overdrive after the pandemic lockdowns,” economists Nathan Janzen and Claire Fan said in a statement. RBC article published on Wednesday.
“But now a historic job restriction, skyrocketing food and energy prices and rising interest rates are looming. Those pressures are likely to push the economy into a moderate contraction in 2023…Still, by historical standards, we expect the slowdown to be modest.”
Janzen and Fan said strong activity within the travel and hospitality sectors and higher commodity prices are helping fuel the recovery, but a lack of workers is hampering companies trying to expand. They note that while there were 70 percent more job openings last month compared to the same time period before the pandemic, employers were competing for nearly nine percent fewer workers in the job market.
“Soaring prices are cutting into Canadians’ purchasing power at gas stations and grocery stores,” they said.
“As the economic contraction unfolds next year, [the unemployment] The rate is likely to rise another one-and-a-half percentage points to 6.6 percent. These job losses will come at a time when Canadians are already grappling with higher prices and debt servicing costs, factors that have hit low-income households the hardest.”
Meanwhile, a report released Tuesday by the Canadian Center for Policy Alternatives (CCPA) found that in the past 60 years, the three times the Bank of Canada has succeeded in reducing inflation by 5.7 percent through raising fast and aggressive interest rates, a recession followed. But economists at RBC and elsewhere have said there are few alternatives central banks can use to deal with inflation.
“The Bank of Canada now has no choice but to act,” Jazen and Fan wrote.
“Inflation has been too strong for too long and is starting to creep into longer-term consumer and business expectations. Higher inflation expectations can become self-fulfilling, making companies more likely to pass on cost increases and consumers more willing to pay for them.”
Even without interest rate moves, slowing growth and demand outside the country will weigh on Canada.
Despite these concerns, RBC believes the recession will be less severe than previous economic downturns.
“Global inflation pressures may soon peak,” economists predict.
“Prices continue to rise too fast and inflation will not slow sustainably until demand falls. But once that happens, central banks will lower interest rates again… We don’t think it will take long to correct that weakness in 2024 and beyond.”
Graphic from CTVNews.ca Data Journalist Deena Zaidi