An updated economic outlook from Deloitte Canada released Thursday shows a rougher path than first thought for gross domestic product — the benchmark measure for Canada’s economic output.
“Over the near term, we expect the economy to continue to struggle in the face of high household debt, soaring interest payments and stubbornly persistent inflation,” the report reads.
Many economists were surprised last month by news that Canada’s economy contracted slightly in the second quarter of this year. Deloitte is calling for continued GDP decline for the remaining quarters of 2023 before a return to modest growth starting in 2024.
All told, the firm now expects real GDP growth of 1.0 per cent in 2023 and 0.9 per cent in 2024, revised down from expected increases of 1.3 per cent and 1.0 per cent, respectively, in an earlier June forecast.
Deloitte said that while an economic slowdown tied to the Bank of Canada’s interest rate tightening cycle has long been expected, it’s finally coming to bear.
The report cites households drawing down pandemic-era savings and some homeowners shifting their mortgages into negative amortizations as factors that pushed back the slowdown, but said these impacts may have “run their course” en route to a slower fall and winter.
Deloitte also expects that population growth tied to strong immigration levels will outpace job gains in Canada, driving the unemployment rate to 5.9 per cent in Canada in early 2024, up from the 5.5 per cent reported for August.
With the economic cooldown finally arriving, Deloitte expects the Bank of Canada will have finished its rate-hike cycle aimed at restoring annual inflation back to the central bank’s two per cent target.
Inflation's uptick a thorn in Bank of Canada's rate path
But inflation’s path back to target has not been linear.
The inflation rate has increased in two consecutive months, most recently rising to 4.0 per cent in August from recent lows of 2.8 per cent in June. Statistics Canada said earlier this month that higher gas prices and rising shelter costs including mortgage payments were largely to blame.
Deloitte considers this inflationary spike to be “transitory,” but does cite an acceleration in the core inflation metrics as something that might disturb the Bank of Canada.
A revised rate forecast from the Bank of Montreal this week also points out that the central bank is in a tough spot with the inflation uptick in the near term and expectations of further slowing in the economy in months to come as past rate hikes take hold.
BMO says the Bank of Canada will be paying close attention to the upcoming inflation and jobs reports in September before making its rate decision on Oct. 25 as it walks a “fine line” between overtightening and undertightening its monetary policy.
“While that line could still result in another rate hike, it’s more likely to involve keeping rates where they are… for longer,” the BMO rate forecast read.
As such, BMO now sees eventual rate cuts starting later than in its August outlook, and the Bank of Canada’s policy rate to ease starting in the third quarter of 2024 rather than the second quarter.
BMO expects the benchmark interest rate at the end of next year to be 4.5 per cent, a quarter percentage point higher than earlier forecasts.
Deloitte, too, has a modestly higher rate path for the Bank of Canada through 2024. But the firm still expects the policy rate to end next year at four per cent, with inflation returning to the two per cent mark in mid-2025 — the same timelines given by the central bank itself.
At that point, Deloitte expects the policy rate will fall to a “neutral rate” of three per cent.
Deliberations from the central bank’s latest decision on Sept. 6 show the governing council worried the choice to hold rates steady would spur market expectations that rate cuts could be imminent.
The Bank of Canada will release revised forecasts for economic growth and inflation in a monetary policy report at the same time it reveals its October rate decision.