Canada will enter a mild recession in 2023, according to Desjardins economists

Montreal, CA - September 3, 2019: Mouvement des Caisses Desjardins logo on the facade of the Complexe Desjardins building.

“We now expect the Canadian economy to tip into a mild recession in the first half of 2023,” the Desjardins economists wrote. (Getty Pictures)

Desjardins economists predict Canada will slip into a mild recession in the first half of 2023 as aggressive interest rate hikes, a slowing housing market and weak U.S. growth weigh on the outlook economy of the country.

In a report released on Thursday, economists at Desjardins said that getting inflation soaring back into the 2% range “will not be easy” and that a soft landing – where inflation is brought under control without leading to a recession – has become “increasingly unlikely”.

“The Canadian economy, like so many others, appears to be entering a mild slowdown that is expected to reach its nadir in early 2023. In our view, this decline is a necessary evil and will help offset some of the imbalances that are fueling inflation Chief Economist Jimmy Jean, Senior Director of Canadian Economics Randall Bartless and Senior Economist Hendrix Vachon wrote in the research note.

“We now expect the Canadian economy to tip into a mild recession in the first half of 2023.”

As Canadian inflation slowed to 7.6% in July, the Bank of Canada signaled that continued interest rate hikes are needed to bring soaring inflation under control. The central bank has been raising rates aggressively since March, with its latest hike of 100 basis points taking its benchmark rate to 2.5%.

The benchmark interest rate is expected to hit at least 3.25% this fall, which Desjardins economists say will put additional pressure on the Canadian real estate market and weigh on household spending and business investment, driving a slight contraction in real GDP in early 2023.

But the most important factor weighing on growth will be a declining housing market. Since peaking in February, home sales have fallen 31% nationwide and prices have fallen 17%, economists noted. Jean says in a separate note to clients that the correction in the housing market and the fallout on domestic demand will be enough to orchestrate two consecutive quarters of GDP contraction early next year.

“We expect the housing market to continue to cool for several more quarters, which should lead to lower residential investment through the end of 2023,” they wrote.

“This will act as the main drag on the Canadian outlook.”

With growth slowing, economists have warned that the labor market will weaken and likely push up the unemployment rate. However, they also noted that with the labor market starting from a strong position and with record labor shortages, the unemployment rate could rise less than expected. Higher savings rates among Canadian households could also reduce the number of households in financial difficulty.

Still, economists noted that the soft landing scenario is less realistic than a “short and shallow” recession, but that “failure to react to high inflation would be even more detrimental to long-term economic growth.” .

“Inflation hurts everyone, but especially the most vulnerable. It destroys purchasing power, and many Canadians don’t see their income keep up with their spending. Inflation also adds uncertainty to financial markets and discourages investment,” they wrote.

“A recession in 2023 may not be good news, but it should help avoid an even more painful outcome. It is also likely to lay the groundwork for stronger growth in 2024, accompanied by inflation. weaker and more stable.”

Alicja Siekierska is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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