Key themes 2023 – A year in recession for Canada

Canada has likely just entered a moderate recession that will last for much of 2023. Prevailing household debt and housing imbalances will mix with pandemic and geopolitical forces to make Canada’s recession deeper than most advanced economies. We expect GDP will contract by 1.3% in 2023, well-below consensus expectations, with six key themes featuring prominently.

What you will learn:

1. Canada will be in recession for most of 2023. Aggressive monetary policy tightening, high inflation, lower household spending and a continued slump in housing will cause GDP to fall 2.3% peak-to-trough from Q4 2022 to Q3 2023.
2. Highly indebted households and overvalued housing will be hard hit. After soaring during the pandemic, housing is in the midst of a major correction with prices forecast to fall 30% before bottoming in mid-2023.
3. Labour markets will loosen but historic shortages are a wild card. Mounting job losses for a labour force that is growing, supported by strong immigration, will lift the unemployment rate to near 8% by late 2023 from 5.1% currently. Still, widespread labour shortages will prompt firms to retain hard-to-find workers, limiting the drop in employment relative to past downturns.
4. Inflation will fall but remain above the central bank’s 2% target next year. Headline CPI inflation will continue easing from its 8.1% y/y peak in June 2022 to just below 3% y/y in late 2023. Falling energy and commodity prices, improving supply chains globally, lower house prices, weaker aggregate demand, and building labour market slack domestically will all contribute.
5. The Bank of Canada is unlikely to ease during 2023 despite the recession. We expect the BoC to keep the policy rate at 4.25% through 2023 as it assesses the economy and inflation. The BoC is unlikely to begin lowering the policy rate to a neutral setting until 2024 – once it’s convinced that inflation is on a sustainable path back to the 2% target.
6. Major fiscal stimulus is not coming. To avoid undermining the BoC’s efforts to tame inflation, major new fiscal stimulus is unlikely unless the recession is severe.