The pain of the upcoming recession won’t be distributed equally among Canadian businesses and households, says a new report by RBC Economics.
The manufacturing sector will likely be among the first to pull back while some high-contact service sectors like travel and hospitality could prove more resilient than in a ‘normal’ historical recession, it said.
“Cracks are forming in Canada’s economy. Housing markets have cooled sharply. Central banks are in the midst of one of the most aggressive rate-hiking cycles in history. And while labour markets remain strong, employment is down by 92,000 over the last four months,” said the report.
“And the pressure is still building. While the Bank of Canada is expected to lift the overnight rate to 4%, the U.S. Federal Reserve will likely hike to between 4.5% and 4.75% by early 2023. These factors will hasten the arrival of a recession in Canada—which we now expect to start in the first quarter of 2023 (one quarter earlier than our previous projection).
“What happens next will depend on a range of factors, with interest rate increases the most significant among them. Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably. We expect the Bank of Canada to pause its rate-hiking cycle in late 2022 followed by the Fed in early 2023. But that’s contingent on inflation pressures easing. More stubborn inflation trends over the coming months could yet prompt additional hikes, and a potentially larger decline in household consumption and a deeper recession.”
The report said the labour market is the tightest it’s been in decades. An excess of job openings and a scarcity of workers will protect against a major spike in unemployment in the very near-term.
“The jobless rate will still rise, but we expect longer job search times for the unemployed, and hours cut for the employed at first,” said RBC.
“More outright layoffs will follow, and we expect the weakening in the economy will push the jobless rate close to 7% by the end of 2023—up almost 2 percentage points from lows of 4.9% in June and July. This is slightly higher than our previous forecast but still low relative to previous downturns.
“That said, households are already feeling the squeeze of economic headwinds. Rising inflation and higher borrowing and debt servicing costs are expected to shave almost $3,000 from average purchasing power in 2023. And while drum-tight job markets have pushed wages higher, it hasn’t been enough to offset these losses. This will weigh most heavily on Canadians at the lower end of the wealth spectrum, particularly those whose disposable income has faded alongside pandemic support.”
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