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Ottawa expects Canada to avoid recession, but interest rates could play spoiler

Click to play video: 'Fiscal update: Feds target Airbnb operators, free up new funds to build homes'
Fiscal update: Feds target Airbnb operators, free up new funds to build homes
Deputy Prime Minister and Finance Minister Chrystia Freeland has presented the federal government's fall economic statement, with a focus on boosting Canada's housing supply by spending another $16 million. David Akin explains when that money will actually be made available; how the feds are also targeting Airbnb operators; and the reaction from the opposition – Nov 21, 2023

The Canadian economy is now expected to avoid a recession, according to the Liberal government’s fall economic statement, but the path for interest rates and inflation could put that forecast at risk.

Ottawa’s fall fiscal update released Tuesday included revisions to the government’s economic forecasts, sourced from surveys of private sector economists.

Those surveys show the Canadian economy is “now expected to avoid a recession” amid slowing growth. That’s revised up from calls for a shallow recession in the 2023 budget back in March.

The shifting forecast is largely due to higher-than-expected growth so far in 2023, at the cost of slowing real gross domestic product (GDP) growth next year. Real GDP is now expected to come in at 1.1 per cent this year — revised up from 0.3 per cent forecast in the budget — and cool to 0.4 per cent growth in 2024, more than a percentage point lower than previous predictions.

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A slowing economy is expected to push Canada’s unemployment rate up to 6.5 per cent from October’s levels of 5.7 per cent, according to the fall economic statement. But the fiscal update says that this is more a result of slowing hiring amid robust population growth, “rather than a large number of layoffs.” Unemployment is expected to settle at an average of 6.2 per cent in 2025 before declining in the years after.

The consensus of private sector economists surveyed for the fiscal update has the annual inflation rate holding at or above three per cent in the first quarter of next year and hitting two per cent by the end of 2024. That comes after Statistics Canada reported Tuesday that inflation saw a substantial cooling of 0.7 percentage points to 3.1 per cent in October.

Click to play video: 'Canada’s inflation rate dropped to 3.1% in October: StatsCan'
Canada’s inflation rate dropped to 3.1% in October: StatsCan

However, the fall fiscal update also outlined what might happen to Canada’s economy if underlying price pressures remain resilient.

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In this scenario, Canadians continue to face larger price increases and core inflation remains persistently higher, and the Bank of Canada would be forced to raise interest rates by another quarter percentage point before its rate tightening cycle completes.

Interest rates would remain high for most of 2024 and start to decline by the end of next year.

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That would be enough to drag Canada into a “shallow recession,” the fiscal update projects, with real GDP contracting 1.7 per cent from peak to trough. The unemployment rate then peaks at 7.1 per cent.

On the rosier side, underlying inflation could also fall faster than projected in the fiscal update, which could push the Bank of Canada to cut rates sooner than anticipated. This upside scenario also imagines sustained demand globally if the Chinese and United States economies prove more resilient than the baseline forecasts.

The Canadian economy would successfully avoid any substantial slowdown in 2024, according to this forecast, and the unemployment rate would average half a percentage point lower next year than in the current outlook.

Early economic data from StatCan for the third quarter of the year shows a chance the country’s economy has already tipped into a technical recession, which is defined as two consecutive quarters of declining GDP. Most economists look for more breadth and depth in the downturn before declaring a formal recession, however.

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Signs of slowing in the Canadian economy have contributed to the Bank of Canada’s calls to keep its policy rate unchanged in the last two decisions. The central bank’s final rate decision of the year comes on Dec. 6.

Bank of Canada governor Tiff Macklem is expected to speak to the Saint John Region Chamber of Commerce in New Brunswick later on Wednesday.

Click to play video: 'Liberal fall economic statement ‘does not meet’ Canadians’ needs: Singh'
Liberal fall economic statement ‘does not meet’ Canadians’ needs: Singh

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