Mild recession forecast for Canada this year: Deloitte

A new report release Tuesday by Deloitte Canada is forecasting a mild recession for the country this year.

Key findings of the Economic Outlook Tight Monetary Policy to Squeeze Economic Growth:

• Forecast that real GDP to fall by 0.5 per cent this year and rebound with growth of two per cent in 2024;
• Inflation clocked in at 5.9 per cent in January, decelerating from the 6.3 per cent pace in December 2022, and the lowest growth since March of last year;
• In the first quarter of 2023, consumer spending is predicted to decline at an annualized rate of 0.1 per cent and fall a further 0.6 per cent in the second quarter, before beginning to recover in the second half of 2023;
• By the end of the year, expect to see both the Federal Reserve and Bank of Canada move to cut interest rates, a process that will continue throughout 2024 as rates move back toward their neutral level; and
• As monetary policy eases throughout next year, we will see better growth prospects in 2024 and 2025.

Trevin Stratton

“The good news is, the recession we’ve been anticipating is not expected to be as deep as projected last quarter, thanks in part to the continued resiliency of the labour market, which is supporting incomes, and we will see better growth prospects in 2024 and 2025,” said Trevin Stratton, National Economic Advisory Leader, Deloitte Canada. “The bad news is that the downside economic risks continue to grow as there are several factors impacting Canada’s economy, like the recent Silicon Valley Bank and Credit Suisse failures, a rapid rise in borrowing costs, and a downturn in the US, which are all adding to a landscape of elevated uncertainty.

“While the level of inflation has been coming down in recent months, it’s still too high for comfort, and the Bank of Canada’s pause on rate hikes is contingent on inflation continuing to decelerate in line with their expectations. Keeping in mind the near-term decline in economic output, our forecast does see inflation cooling rapidly throughout the rest of the year.”

The report said the recent bank failures in the US have renewed fears about the economic outlook. However, it was
well known that the rapid rise in interest rates would have economic consequences; after all, the point of raising interest rates is to slow economic growth broadly enough that price pressures ease.

“When you combine high levels of debt with rising interest rates, financial vulnerabilities inevitably emerge. While bank runs were not an expected outcome, for now the impact on the broader financial system and economy has been limited. Provided we don’t see widespread issues in the financial system, the troubles at SVB and Signature Bank are unlikely to have a substantial impact on the economic outlook. Our baseline economic outlook, therefore, continues to call for a mild recession followed by
an easing of monetary policy that helps fuel an economic recovery next year,” said the report.