RBC updated its prediction in a note to clients Wednesday morning, now calling for a Canadian recession to begin as early as the first quarter of next year.
The bank first said in July that it expected a recession to hit the economy sometime in 2023, but that it would be “moderate” and “short-lived.”
RBC economists Nathan Janzen and Claire Fan wrote Wednesday that they now expected the jobless rate in Canada to hit seven per cent next year, up from an initial forecast of 6.6 per cent unemployment.
“Cracks are forming in Canada’s economy. Housing markets have cooled sharply. Central banks are in the midst of one of the most aggressive rate-hiking cycles in history. And while labour markets remain strong, employment is down by 92,000 over the last four months,” the pair wrote.
Interest rate hikes from the Bank of Canada will be a key factor in determining how deeply the economy contracts, they said.
Janzen and Fan expect the central bank to pause its rate hike cycle in late 2022 if inflation continues to show signs of “meaningfully” easing. If not, further increases are warranted.
“More stubborn inflation trends over the coming months could yet prompt additional hikes, and a potentially larger decline in household consumption and a deeper recession,” the note read.
High inflation and interest rates, which raise the cost of borrowing, will shave $3,000 off the purchasing power of the average Canadian household next year, according to the projections.
While RBC expects softness in Canada’s manufacturing industry amid the recession, travel and hospitality could prove “more resilient” than previous downturns. The bank cited “lingering demand” for services in these sectors after two years of COVID-19 restrictions as keeping these businesses aloft.
Given the “drum-tight” labour markets in Canada — unemployment was a low 5.2 per cent in September — RBC says employers already grappling with staff shortages will be less likely to resort to layoffs in the event of a downturn.
RBC’s updated forecasts come one day after the International Monetary Fund (IMF) issued dire warnings about a global economic slowdown, arguing “the worst is yet to come” and that for many people, 2023 will “feel like a recession.”