Tighter conditions could push Canadian economy into a recession by end of year, new report finds

PR Newswire
Thursday, June 1, 2023 at 11:30am UTC

Tighter conditions could push Canadian economy into a recession by end of year, new report finds

Canada NewsWire

  • Economic forecasts suggest a mild and brief recession is a strong possibility in 2023, with the downturn hitting the economy unevenly.
  • The Bank of Canada could cut interest rates in 2023 to weather any recession signals.
  • Lending and investment in Canada will continue to be restricted due to rougher economic terrain.

TORONTO, June 1, 2023 /CNW/ - RSM Canada ("RSM"), a leading global provider of audit, tax and consulting services focused on middle market businesses, today launched its spring 2023 edition of The Real Economy Canada – a quarterly report that provides Canadian businesses with analysis and insights on the country's complex economic conditions.

As the Bank of Canada tries to simultaneously tame inflation and guide the economy to a softer landing, the second edition of this year's The Real Economy Canada examines the impact of elevated interest rates on the country's economic growth, the declining rates of borrowing and investment in Canada, and the potential for interest rate cuts towards the end of 2023.

The report also shines a light on Canada's private equity market as the rate of deals slow – especially in the technology sector – and how Canadian businesses are pursuing sustainability and ESG as key areas of investment.

Key findings in this quarter's report include:

A mild and brief recession is on the horizon for Canada
  • The Canadian economy has shown signs of a slowdown as steep interest rate hikes continue to put pressure on borrowing costs and, as a result, investment.
  • While the majority of the economy will likely feel the impact of a recession, 40 per cent of the market could yet avoid a recession altogether, with fluctuations in the labour market playing a deciding factor.
  • Though a mild recession is predicted, the Bank of Canada is in a tougher position than it was in 2008 given it won't be able to cut rates as aggressively as it did fifteen years ago.
Despite earlier projections, the Bank of Canada could cut interest rates this year
  • The potential of rate cuts by the Bank of Canada in the second half of 2023 could either be in reaction to the likely recession to come this year or a projection that supply and demand will regain its balance, allowing inflation to soften.
  • Forward markets are pricing in rate cuts by the end of 2023 despite the central bank's assertion that rates could rise if inflation proves persistent.
  • The Bank of Canada's target inflation range of under three per cent will remain elusive because of a resilient labour market that continues to drive up wages at a robust four per cent to five per cent annual rate.
Tightening financial conditions continue to impact investment and borrowing
  • Canadian gross fixed investment is projected to decline by 2.7 per cent this year, while real GDP is expected to grow by less than one per cent.
  • The drop in investment can be attributed to the increase in the cost of capital and operating expenses brought about by higher interest rates, domestically and abroad.
  • Overall, bank lending has become restrictive in response to the increased cost of financing commercial and consumer loans, and this trend is likely to continue for as long as the Bank of Canada maintains or raises its rate.

"After months of steep interest rate increases, we're now starting to see the impact of those decisions in Canada's real economy, with a brief recession on the horizon for later this year," says Tuan Nguyen, economist for RSM. "But despite this downturn, we still expect a good portion of the Canadian economy to avoid a recession altogether, thanks in large part to the pockets of growth across multiples industries. The deciding factor will be the labour market - depending on how that performs, it could either sink or lift Canada's economy almost single-handedly."

Joe Brusuelas, chief economist for RSM, added: "Lending conditions for Canadian businesses and consumers remain restrictive, despite the period of calm we're seeing in the markets. This reflects the uncertainty among trading partners over a slowing economy and elevated inflation, as well as the geopolitical tensions that continue to have an impact."

For more information on The Real Economy Canada, or to download the report, please visit their webpage.

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