Canada faces harder recession

A new report by Deloitte Canada indicates that Canada is expected to experience a deeper recession than previously expected this year as a result of the Bank of Canada’s rapid interest rate hikes and the slowing U.S. economy. The report, titled “Economic Outlook”, was released on Tuesday and states that the impact of rising interest rates and the slowing U.S. economy will drag down economic growth in Canada for three consecutive quarters, resulting in a 0.9% contraction in GDP growth in 2023.

The report notes that in September, Deloitte had forecasted that Canada would enter a short-lived recession, with growth stalling in the first quarter of 2023 before returning to positive territory in the second quarter of the year. At the time, the Bank of Canada had hiked its benchmark interest rate by 300 basis points. However, the central bank raised the benchmark rate an additional 100 basis points, bringing the overnight rate to its current position of 4.25%. As a result, interest payments on household debt in Canada have increased significantly, with an annual increase of 16.2% in the third quarter of the year, the largest increase on record.

The report also predicts that consumer spending will decline, but not equally across all categories. Deloitte expects that goods sensitive to interest rates, such as household furnishings and appliances, will be hit the hardest, while discretionary spending on services such as communication, recreation, accommodation, and food will also decline. Deloitte now expects real GDP growth to fall in the first and second quarters of the year, with zero growth predicted for the third quarter this year.

The report also notes that one of the “wild cards” in the forecast is the Canadian labor market, which has remained tight despite concerns about an economic slowdown. The report states that while recessions traditionally are associated with significant job losses, the current situation is different as businesses need to balance softening demand against a tight labor market. Despite the dire forecast, the report notes that the recession will be relatively mild compared to the Great Recession in 2008 and the pandemic-induced slowdown in 2020.