Research Briefing | Sep 21, 2023

Canada’s economy stalls as hard landing inexorably grinds nearer

Canada’s economy has now likely fallen into the recession that we have long been expecting. Key imbalances – highly indebted households and overvalued house prices – can’t evade the coming full impact of the Bank of Canada’s aggressive 475bps hike in the policy rate. Though milder than past recessions, we expect a 1.5% peak-to-trough drop in GDP from Q2 2023 to Q1 2024.

What you will learn:

  • An imminent consumer pullback, combined with a deepening housing correction, will finally push the economy into recession. Consumer spending growth has slowed dramatically since early 2023 when strong immigration, solid job gains, and a drawdown of pandemic excess savings underpinned a pent-up spending spree. Extended mortgage amortisations have merely delayed the eventual full hit from higher rates on debt service costs, and households are now beginning to cut spending.
  • Wildfires also cut Q3 growth, though likely by a modest 0.1ppt-0.2ppts, and we expect post-fire rebuilding to be slow. A looming US downturn will curb exports, while weaker demand prospects, lower profits, and higher borrowing costs will temper business investment.
  • Labour markets are gradually loosening amid strong immigration and slowing hiring. We expect job losses will lift the current 5.5% unemployment rate to over 7% in 2024. But persisting labour shortages suggest firms may opt to hold onto workers and cut hours, limiting job losses.
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