Economists from the Royal Bank of Canada expect the country to enter a recession in the first quarter of 2023.
"Cracks are forming in Canada鈥檚 economy," according to by RBC economists Nathan Janzen and Claire Fan. "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."
Janzen and Fan previously predicted a "moderate" recession would begin in Canada in 2023. They now anticipate interest rates will rise higher to four per cent in Canada and 4.5 to 4.75 per cent in the U.S., which "will hasten the arrival of a recession in Canada ... one quarter earlier than our previous projection."
"The pain of the upcoming recession won鈥檛 be distributed equally among Canadian businesses and households," Janzen and Fan added. "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."
Aimed at fighting inflation, the Bank of Canada has been hiking its key interest rate since March after it fell to a low of 0.25 per cent during the COVID-19 pandemic. Now sitting at 3.25 per cent, RBC predicts Canadian rate hikes will peak in late 2022.
"But that鈥檚 contingent on inflation pressures easing," Janzen and Fan warned. "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."
LOWER-INCOME CANADIANS MAY BE HARDEST HIT, WITH UNEMPLOYMENT RISING
Fuelled by inflation, higher prices and interest rates are expected to trim almost $3,000 from the average household's purchasing power, according to RBC.
"And while drum-tight job markets have pushed wages higher, it hasn鈥檛 been enough to offset these losses," Janzen and Fan explained. "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."
RBC also expects the weakening economy to push the unemployment rate to seven per cent by the end of 2023, up from a low of 4.9 per cent in June and July. That's higher than what RBC , but less severe than during earlier economic downturns.
"An excess of job openings and a scarcity of workers will protect against a major spike in unemployment in the very near-term," Janzen and Fan wrote. "The jobless rate will still rise, but we expect longer job search times for the unemployed, and hours cut for the employed at first. More outright layoffs will follow."
TRAVEL AND HOSPITALITY LIKELY RESILIENT, MANUFACTURING COULD SUFFER
Severely impacted by COVID-19 restrictions, the travel and hospitality sectors are now projected to weather the anticipated recession better than other industries. Employment numbers in these sectors are still below pre-pandemic levels, RBC notes, making layoffs less likely.
"And this time, there remains lingering demand for travel and hospitality services after two years of pandemic lockdowns," Janzen and Fan wrote. "That will limit a pullback in these sectors in 2023."
The manufacturing sector, however, is expected to feel additional pain.
"The manufacturing sector looks poised to soften as spending on physical merchandise cools, particularly in the U.S., the world鈥檚 biggest consumer market and destination for 75% of Canadian exports (65% of which are 'manufactured' products)," Janzen and Fan wrote. "In Canada, despite still-strong manufacturing output, surveys have already flagged deteriorating sentiment among businesses in that sector."
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