Rates show signs of moderating in late 2023 or 2024
The Canadian economy shows signs of a mild recession in 2023, despite early signs of easing inflation pressures. The unemployment rate has increased slightly since the summer but remains low by historical standards. Headwinds from aggressive central bank interest rate hikes are gaining strength, and the housing market has already seen a sharp decline since spring.
Consumer spending is expected to soften further as high inflation, and rising debt payments cut into purchasing power. While risks to the outlook remain tilted to the downside, there are early signs that inflation pressures may have peaked, and central banks may be close to the end of their rate-hiking cycle.
While inflation is still well above target, early signs of slowing price growth suggest that central banks have raised rates close to the levels needed to slow economic activity and inflation in the year ahead.
A mild recession is expected despite the current pause in interest rate hikes. The residual impact of higher interest rates will continue to ripple through the economy in 2023, softening consumer spending in the months ahead.
The Bank of Canada (BoC) has paused further increases to the current overnight rate at 4.50% and will watch to see if the past increases have the desired effect, bringing inflation below 2%.
There is a time lag between interest rate increases and their impact on economic activity. The BoC is waiting to see if its objective has been achieved before making further increases or reductions to its policy rate. If inflation is not brought fully under control then higher interest rates will be needed.
In the meantime, the share of household disposable income eaten up by debt payments will spike higher, to record levels, by the end of 2023. Higher household debt payments and inflation are expected to subtract an additional $3,000 from purchasing power per-household in 2023.
Keep in mind that interest rate forecasts from Canadian banks over the past year have consistently underestimated future rates.
In March 2022, Canadian bank forecasts for the 2023 BoC rate predicted a range of 1.25% to 2.50%.
And in June 2022, they predicted a range of 2.50% to 3.25%
by September 2022, raised the forecast to between 3.75% and 4.00%
As of the end of January 2023, the BoC Target rate is 4.50%
The Canadian economy is showing early signs of a recession in 2023. Headwinds from aggressive central bank interest rate hikes are gaining strength, and the housing market has already seen a sharp decline since spring. Consumer spending is expected to soften further as high inflation, and rising debt payments cut into purchasing power. Despite early signs that inflation pressures may have peaked any lowering of interest rates will likely be accompanied by a recession.
