By Jock Finlayson and Ken Peacock
The threshold has been crossed.
Canada’s largest bank, RBC Financial Group, just published a report predicting that Canada will tip into recession in early 2023.
RBC’s call is unusual. Anticipating recessions is notoriously difficult. And it is uncommon for analysts at any of the country’s large financial institutions to even whisper the dreaded R-word until evidence of a downturn is overwhelming.
Storm clouds are clearly gathering, but at this stage, few indicators are pointing to an imminent recession. But the RBC forecasters see the skies darkening and expect a bumpy road ahead for the Canadian economy.
The case for a near-term recession is not obvious. Canada’s labour market has been drum tight for a year or more. The national unemployment rate has been flirting with record lows, and a recent Statistics Canada survey finds at least one million job vacancies spanning every region of the country.
Moreover, while higher global energy, food and industrial raw materials prices are undermining economic growth globally, Canada has enjoyed a partial reprieve and positive offset because we are big producers and exporters of oil, gas, metals, potash, and many foodstuffs that other countries are paying higher prices for.
The World Bank recently slashed its 2022 global growth forecast by more than a full percentage point and cut its outlook for 2023 as well. America’s giant economy also seems to be losing steam, which matters to Canada since three-quarters of our exports are sold there.
Equity markets have plunged as investors digest the implications of less favourable macroeconomic conditions. Other high-risk asset classes, like bitcoin and the wildlands of the broader crypto universe, have suffered epic selloffs.
Another reason to anticipate a Canadian downturn is the sharp rise in interest rates here at home. Borrowing costs have risen steeply in the last six months as the Bank of Canada belatedly acts to tame runaway inflation by boosting its short-term policy rate.
Interest rates are also climbing in the U.S. and other advanced economies amid a worldwide inflation surge. Higher mortgage rates are already weighing on Canada’s overheated housing markets, with both sales volumes and transaction prices falling in the last two months. Many forecasters expect a 15% to 20% drop in Canada-wide established home prices from early…