{"id":1671,"date":"2022-07-07T04:00:13","date_gmt":"2022-07-07T04:00:13","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2022\/07\/07\/canadas-economy-is-headed-for-a-recession\/"},"modified":"2025-03-26T04:54:43","modified_gmt":"2025-03-26T04:54:43","slug":"canadas-economy-is-headed-for-a-recession","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/featured-analysis\/insights\/canadas-economy-is-headed-for-a-recession\/","title":{"rendered":"<b>Proof Point: <\/b>Canada&#8217;s economy is headed for a recession"},"content":{"rendered":"<ul class=\"disc pad-l\">\n<li>Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023.<\/li>\n<li>The jobless rate will rise next year but to less severe levels than in previous downturns.  <\/li>\n<li>Though higher rates will restrict growth, they&#8217;re necessary to tame inflation and cool an overheating economy.<\/li>\n<li>Household spending that accelerated out of pandemic lockdowns will slow as higher prices, interest rates and unemployment hit households. <\/li>\n<li><b>The bottom line:<\/b> This recession will be moderate and short-lived by historical standards\u2014and can be reversed once inflation settles enough for central banks to lower rates.  <\/li>\n<\/ul>\n<hr>\n<h4>In Canada, economic pressures are closing in  <\/h4>\n<p>When you\u2019re at the top of the hill the only way to go is down. Canada\u2019s economic growth has fired on all cylinders following pandemic shutdowns. But a historic labour squeeze, soaring food and energy prices and rising interest rates are now closing in. Those pressures will likely push the economy into a moderate contraction in 2023.  <\/p>\n<p>Canadians continue to fuel a recovery in the travel and hospitality sectors. And higher global commodity prices have boosted the mining sector. But businesses are struggling to find the workers they need to expand production. There were nearly 70% more job openings in June than before the pandemic\u2014and those hunting for staff were forced to compete for almost 9% fewer unemployed workers. Meantime, soaring prices are cutting into Canadians\u2019 purchasing power at the pump and the grocery store. <\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/23\/2025\/03\/Chart-2-Issue-7-1200px-CAN-US.png\" alt=\"\" width=\"1200\" height=\"639\" class=\"alignnone size-full wp-image-38112\" \/><\/p>\n<h4>This recession won\u2019t be as severe as prior downturns<\/h4>\n<p>Both in Canada and abroad, central banks are aggressively hiking rates to slow household demand and fight inflation. In Canada, much of the price pressure is coming from beyond our borders, as energy and agricultural prices surge on supply chain snarls stemming partly from the Ukraine war. <\/p>\n<p>Strong domestic demand for housing and services has intensified these pressures and the labour crunch is driving wages higher. The Canadian unemployment rate is now almost a full percentage point below RBC\u2019s assumption of its longer-run neutral (non-inflationary) level. As the economic contraction plays out next year, that rate will likely rise another 1 \u00bd percentage points to 6.6%. <\/p>\n<p>These job losses will come at a time when Canadians are already grappling with higher prices and debt servicing costs (factors that have hit lower income households the hardest). Still, by historical standards, we expect the slowdown to be modest. Indeed, a 6.6% unemployment rate would still be more than 2 percentage points below the 8.7% peak in the 2008\/09 recession. <\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/23\/2025\/03\/Chart-1-Issue-7-1200px-2.png\" alt=\"\" width=\"1200\" height=\"787\" class=\"alignnone size-full wp-image-38109\" \/><\/p>\n<h4>Higher rates are key to reining in inflation expectations <\/h4>\n<p>Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act. Inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations. Higher inflation expectations can become self-fulfilling, making businesses more likely to pass on cost increases and consumers more willing to pay for them (and demand higher wages). A scenario in which Canadians believe inflation will run well past the bank\u2019s target range of 1 to 3% could upend almost three decades of exceptionally effective inflation targeting policy. It could also require much larger and more damaging interest rate hikes to re-anchor prices. <\/p>\n<p>Higher 5-year inflation expectations drove the U.S. Fed\u2019s decision to hike rates by 75 basis points in June. With the BoC confronting a similar increase, a hike at least as large is likely in Canada on July 13th. And neither bank is done. The U.S. Fed and the BoC are expected to lift rates to 3.5% and 3.25% respectively, by the end of 2022. That\u2019s high enough to significantly restrict growth, particularly in Canada, where household debt is very high. <\/p>\n<h4>Slowing growth abroad will spill over into Canada<\/h4>\n<p>Even without rate hikes, labour shortages in Canada and abroad are preventing expansion. The U.S. economy contracted in Q1 and though we\u2019re tracking a small increase in Q2, it wouldn\u2019t take a major forecast miss to have a second quarter of negative growth. We expect the U.S. unemployment rate to rise to 4% by year\u2019s end and climb to almost 5% in 2023. Meantime, emerging markets will struggle with higher food and energy prices, elevated borrowing costs and a strong U.S. dollar. And pandemic disruptions continue to curb growth in China. <\/p>\n<p>These slowdowns in external demand will drag on Canadian growth.  <\/p>\n<h4>The boom in household spending will flag later this year<\/h4>\n<p>Canadian households have socked away over $300 billion in savings since the end of 2019. That\u2019s boosting spending\u2014and adding more inflation pressure. <\/p>\n<p>But the lion\u2019s share of savings remain with higher income households, leaving lower income groups more vulnerable to rising rates and prices. Housing markets have softened dramatically, with prices swinging from record highs over the winter to declines in the spring. We expect house prices to fall 10% in the year ahead, subtracting over $800 billion from household net worth. <\/p>\n<p>That would only partially retrace the $2.4 trillion surge in real estate equity since 2019. Still, it will leave Canadians feeling \u201cless wealthy\u201d prompting them to spend less in the housing market and elsewhere.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/23\/2025\/03\/Chart-3-Issue-7-1200px-1.png\" alt=\"\" width=\"1200\" height=\"787\" class=\"alignnone size-full wp-image-38101\" \/><\/p>\n<h4>Rate hikes will reverse but not until inflation cools<\/h4>\n<p>Global inflation pressures may soon peak. Shipping costs have declined. And exceptionally strong demand for goods\u2014which has sparked supply chain challenges and higher input costs\u2014is moderating as consumers in Canada and abroad shift spending to services that weren\u2019t available during pandemic lockdowns. Much of the surge in wheat prices following Russia\u2019s invasion of Ukraine has reversed.<\/p>\n<p>Prices are still rising too fast and inflation won\u2019t slow sustainably until demand falls. But once that happens, central banks will ease interest rates again. Meantime, a slowdown both in Canada and abroad will help temper inflation. A 6.6% unemployment rate in Canada next year wouldn\u2019t be far above long-run \u2018full-employment\u2019 levels. We don\u2019t think it\u2019ll take long to unwind that weakness in 2024 and beyond.<\/p>\n<p><b>View the RBC Economics forecasts for <a href=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2024\/11\/economy_can.pdf\">Canada<\/a> and the <a href=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2024\/11\/economy_us.pdf\">U.S<\/a>. <\/b><\/p>\n<p>\u00a0<\/p>\n<hr>\n<p><em><b>Nathan Janzen<\/b> is a member of the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.<\/em><\/p>\n<p><em><b>Claire Fan <\/b> is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators on GDP, labour markets as well as inflation for both Canada and the US.<\/em><\/p>\n<hr>\n","protected":false},"excerpt":{"rendered":"<p>Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023.<\/p>\n","protected":false},"author":234,"featured_media":1629,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"categories":[83,82,84],"tags":[11,67],"class_list":["post-1671","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-canadian-analysis","category-featured-analysis","category-insights","tag-economy","tag-proof-point"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.2 (Yoast SEO 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