Economic growth has been more resilient than feared in the wake of aggressive interest rate increases last year. Canada’s stalled toward the end of 2022 with a flat GDP growth reading in Q4 the first time the economy has failed to expand since a pandemic-related decline in Q2 2021. But output bounced back 0.3% in January alongside a surge in employment – making a small increase in Q1 look more likely than the small decline we previously expected. Global growth forecasts for 2023 have been revised higher with China emerging from pandemic lockdowns and economic growth in Europe firmer than expected despite the war in Ukraine. And labour markets remain ultra-tight with high (albeit easing) levels of job openings competing for a historically small pool of unemployed. <\/p>\n
Still, interest rates impact the economy with substantial lags – and often end up having unintended consequences. Recent turmoil in financial markets has cast doubt on whether the Fed will continue to raise interest rates. The Bank of Canada already moved to the sidelines announcing a pause in rate hikes in January. But higher interest rates will continue to cut into household purchasing power with a lag. Housing markets have continued to retrench<\/a>, both in Canada and abroad. The global manufacturing outlook has softened, and easing supply chain disruptions and lower (albeit still-high) commodity prices are helping to slow inflation. Against that backdrop, the most likely scenario is still that the U.S. and Canadian economies will both enter mild recessions over the middle-quarters of 2023.<\/p>\n