A person passes by the Royal Bank of Canada building on Bay Street during the COVID-19 pandemic in Toronto on Wednesday, May 27, 2020. Nathan Denette / The Canadian Press
The Canadian economy will enter a “moderate and short-lived” recession in 2023 as it faces rising interest rates and high inflation, the Royal Bank of Canada warned on Thursday.
The recession will not be as severe as previous falls, but it will see consumers reduce spending as they face stronger price growth in decades, higher loan costs and loss of wealth, resulting from a slowdown in the housing market. said the RBC report.
Canadians will also be affected by the loss of jobs, bringing the national unemployment rate, now at an all-time low of 5.1 per cent, to around 6.6 per cent, the bank estimates.
The Bank of Canada and its global counterparts are aggressively raising interest rates, with the aim of curbing demand and reducing inflation. Canada’s annual inflation rate reached 7.7 per cent in May, the highest since 1983. The consensus view on Bay Street is that the Bank of Canada will increase its policy rate by three-quarters of a point. percentage next week to 2.25 percent.
As monetary policy tightens, global investors are betting on it to translate into a recession, which has led to stock market selling and falling commodity prices, such as crude oil. RBC is the first of Canada’s top lenders to predict that the country will go into recession in the short term.
In an April forecast, the Bank of Canada said the economy would grow 4.2% this year and 3.2% in 2023, following inflation adjustments. The central bank will issue a new forecast on Wednesday, along with its rate decision. Private sector forecasters have been pointing to slower growth rates as the inflationary threat persists.
“When you’re at the top of the hill, the only way to go is downhill. Canada’s economic growth has skyrocketed after all the pandemic stops,” RBC economists Nathan Janzen and Claire Fan wrote in their report. “But now they are closing a historic labor tight, rising food and energy prices and rising interest rates. These pressures are likely to push the economy into a moderate contraction by 2023.”
The authors noted that higher interest rates were “necessary to control inflation” and that a recession “can be reversed once inflation settles down enough for central banks to lower rates again.”
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