Canadians could be forgiven for thinking the economy has dodged the recession bullet given the recent raft of strong data points, but not so fast, say economists, who predict the slowdown is coming, just a little later than originally expected.
Economics firms throughout 2022 said Canada’s economy, along with those of other western nations, would fall into recession by year-end, or early 2023 at the latest. But the latest data shows those economies have been more resilient than anyone expected or predicted.
For example, 150,000 new jobs were added to the Canadian workforce in January and the latest retail estimates show that consumers spent more in December than in November, and continued that trend last month.
The jobs market in the United States also stunned to the upside, adding more than 500,000 positions in January, compared to the forecasted 190,000. Overseas, the United Kingdom and European Union narrowly averted contraction in the fourth quarter, with the former reporting flat growth and the latter reporting growth of 0.1 per cent.
But Capital Economics said higher interest rates have dragged down growth in consumer and business credit, “which in turn points to a marked deceleration in GDP (gross domestic product) growth.”
The Bank of Canada has raised its benchmark lending rate 425 basis points to 4.5 per cent from 0.25 per cent in March 2022. The central bank is not expected to make another rate hike at its next policy meeting on March 8, partly because it signalled a pause was likely following the increase it made on Jan. 25 and because last month’s inflation data showed prices are continuing to decelerate.
“It looks like the recessions we have long been forecasting in advanced economies will commence a little later than we had initially envisaged,” Capital Economics said in a note on Feb. 16. “But it still looks likely that the full force of monetary tightening is yet to be felt.”
Others are also revising their outlooks on growth and a possible recession.
“Since we published our last economic outlook for Canada, data have continued to surprise on the upside,” Desjardins Economics said in a Feb. 16 note that revised its near-term forecast for real GDP.
Desjardins is now expecting GDP in Canada to contract in the second and third quarters of this year by 1.2 per cent and 1.9 per cent, respectively. In a previous outlook on Jan. 19, Desjardins called for Canada to slip into recession in the first quarter of this year, recording a contraction of 0.1 per cent followed by contractions of 1.3 per cent in each of the second and third quarters.
The Bank of Montreal is forecasting a Canadian recession to hit in the second and third quarters, with GDP contracting one per cent in each of them.
“In recent weeks, we have been slightly tweaking them to later in this year and a little less negative on balance,” said Douglas Porter, chief economist at BMO Capital Markets, in an email. Porter said BMO had previously forecast average annual GDP of zero per cent for 2023, but “we now have 0.7 per cent for the year.”
Scotiabank Economics is expecting contractions of 0.1 per cent in the second quarter and 0.5 per cent in the third.
“We remain of the view that the United States and Canada will stall and experience a very mild recession but have pushed that contraction to Q2 and Q3 versus our earlier call of a Q1 start,” economist Jean-François Perrault said in a Feb. 6 note.
In a bit of a reversal, Royal Bank of Canada’s latest economic forecast calls for contractions of 0.5 per cent in the first quarter and one per cent in the second quarter. Originally, RBC had the recession starting in Q2 of this year, but pulled it forward to Q1, said economist Nathan Janzen, in an email.
“We’ll reassess after next week’s GDP data,” he said.
Statistics Canada will report GDP figures for December and the fourth quarter on Feb. 28.