Yahoo Finance RBC moves up Canada recession forecast as 'pressure is still building'
A recession in Canada is coming sooner than previously expected, according to RBC Economics.
It's now seeing a "moderate" contraction in the first and second quarters of 2023, a quarter sooner than its earlier forecast, as higher borrowing rates take their toll on the economy.
"The pressure is still building," the bank said in a report, co-authored by RBC economist Nathan Janzen.
The aggressive interest rate hike campaigns in Canada and the U.S. will quicken the arrival of a domestic recession but what happens with rates after that will be the biggest factor in how quick the economy recovers, the report says.
"Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably. We expect the Bank of Canada to pause its rate-hiking cycle in late-2022 followed by the Fed in early 2023. But that's contingent on inflation pressures easing," Janzen said.
He didn't rule out even more rate hikes outside of what's already widely anticipated by Bay Street if inflation proves persistent.
BMO Capital Markets is also predicting a shallow recession in Canada in the first half of next year.
The sky-high cost of living and higher interest rates are poised to shave almost $3,000 off purchasing power for the average household in 2023, the report says, offsetting recent gains in wages.
While the labour market has been tight and businesses have been offering higher pay to attract workers, recent data show the job market has been cooling.
"An excess of job openings and a scarcity of workers will protect against a major spike in unemployment in the very near term. The jobless rate will still rise, but we expect longer job search times for the unemployed, and hours cut for the employed at first," Janzen said.
He expects more companies to conduct rounds of layoffs and the unemployment rate to jump to nearly seven per cent by the end of next year, significantly higher than the current 5.2 per cent.
Unlike typical economic slowdowns though, RBC is expecting sectors such as travel and hospitality to be more resilient, thanks to solid pent-up demand after two years of pandemic restrictions.
The fast-food industry could also be more insulated from mass layoffs since many of these businesses are still grappling with a labour shortage.
Manufacturing, on the other hand, will likely soften as both Canadian and American consumers rein in their spending on goods, according to Janzen.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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