For many Canadians, 2022 was a tough year as interest rates climbed, inflation soared and the economy slowed. Unfortunately, 2023 doesn’t look like it will provide much respite.
Analysts say a recession is looming and unemployment is expected to rise, all while prices remain high and interest rates bite into our purchasing power.
“We could be in store for a bit of a doozy [of a year],” said Royce Mendes, the managing director at Desjardins Capital Markets.
He says 2022 was dominated by rising prices and a rapid increase in borrowing costs. Inflation peaked this summer at 8.1 per cent on an annualized basis. The Bank of Canada’s key lending rate started the year at 0.25 per cent. Seven straight rate hikes have left borrowing costs four full percentage points higher.
Mendes says that sets up a difficult year ahead.
Last year “was a transition to an environment of higher prices and an environment of higher interest rates,” he told CBC News, adding that 2023 “will be a year where we have to live with it for a full year.”
Inflation will continue to dominate 2023
Even seasoned forecasters have found this a tricky period to navigate. The economy is awash in contradictions and the data are quite noisy.
“I’m coming up on my 10th anniversary as chief economist. I would say 2020 was the weirdest [year],” said BMO’s chief economist Douglas Porter. “But this [year’s] is a very odd cycle.”
He points to the end of the pandemic-related restrictions that weighed on the economy, the sharp rise in prices and the continued strength of the labour market as just a few of the countervailing forces at play.
Bank of Canada governor Tiff Macklem raised interest rates seven times in 2022. Here, he speaks during a lunch by the Business Council of British Columbia in downtown Vancouver on Dec. 12, 2022. (Jonathan Hayward/The Canadian Press)
Looking ahead, he says inflation will continue to dominate the economic story of 2023. BMO’s forecasts show inflation will remain stubbornly high, especially through the first half of the year.
He’s predicting the Bank of Canada has one more rate hike in store in January and will then hold rates at 4.5 per cent through the rest of 2023.
All that will continue to weigh on growth. And Porter says that phenomenon is not unique to Canada’s economy.
“I think the global economy as a whole will struggle to see much growth this year. We think the U.S. economy will essentially be flat in the coming years. So, exports are going to face a little bit of a challenge as well,” Porter told CBC News.
Recession forecast
Most private sector forecasts in Canada now assume there will be some kind of a recession in early 2023. Those forecasts assume that it will be short and mild.
But it doesn’t take much to nudge a short and shallow recession into something much worse. In fact, researchers at Oxford Economics believe Canada has already slipped into a recession.
“Canada has likely just entered a moderate recession that will last for much of 2023,” Tony Stillo, Oxford’s director of Canada economics, wrote in a note to clients. “Prevailing household debt and housing imbalances will mix with pandemic and geopolitical forces to make Canada’s recession deeper than most advanced economies.”
Whether you look at private sector forecasts like Oxford’s, or global outlooks from the International Monetary Fund and the Organisation for Economic Co-operation and Development, the emerging picture of 2023 is grim.
“There’s not a lot of positive stories for 2023, so it’s pretty easy to be pessimistic,” said Stephen Tapp, the chief economist at the Canadian Chamber of Commerce.
Tapp says there are plenty of risks to the downside. He says many Canadian companies took on debt during the darkest days of the pandemic and have now seen their debt payments skyrocket as interest rates rose.
Bank of Canada governor explains how far he’s willing to go to get inflation under control
In a wide-ranging interview, Bank of Canada governor Tiff Macklem says Canadians should expect more interest rate hikes, and a mild recession is possible, as the central bank continues its fight against inflation.
He also says the end of China’s zero-COVID policies can upset otherwise healing global supply chains.
But, Tapp agrees with most others, that inflation and interest rates will be the driving force in the economic landscape. And he says in spite of all the pessimism, he can see a path to economic recovery.
“If central banks are winning the war on inflation. If stubbornly high inflation starts to come down faster than markets have priced in, that’s going to be good news and markets could rally, confidence could come up and inflation expectations could anchor faster,” Tapp said.
Should bounce back
That could lead to a faster bounce back in economic growth. And eventually, it would open the door to a reduction in borrowing costs.
A recession has proven to be a pretty effective tool to bring down prices. When the economy shrinks, people don’t buy as much stuff. When they don’t buy as much stuff, prices begin to fall and rebalance with demand.
It can be a painful process, especially when that contraction sweeps into your particular corner of the economy. But, Mendes says that painful part of the process shouldn’t last very long.
“While it won’t be a pleasant year, it will be a year in which hopefully there is meaningful progress made in reattaining the ultimate goal of low and stable inflation.”
In a lot of ways, 2023 will be a mirror image of 2022. Last year started out strong and ended weak and steeped in pessimism. 2023 will begin weak and should end strong.
By this time next year, the economy should have rebounded, inflation should have come under control and there should be a healthy dose of optimism that the Bank of Canada is getting ready to cut interest rates again.
But that’s probably more “shoulds” than most Canadians are comfortable with.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
