Expect 2024 downturn followed by a rate-cut rebound: economists

Is Canada headed for a recession? Economists say we may already be in one, but things could start looking up partway through 2024.

BNNBloomberg.ca spoke with economists who said they are expecting a downturn in early 2024 followed by a rebound later in the year if the Bank of Canada starts to cut interest rates.

Read economists’ predictions about what lies ahead for Canada’s economy below.

RECESSION OUTLOOK

Many economists were calling for a recession to hit in 2023, but economic data has been surprisingly resilient in the face of a steep interest rate-hiking campaign from the Bank of Canada aimed at reining in inflation.

As a result, Canadians’ fears about a possible recession in 2024 have dropped since a year ago, though most Canadians remain worried about the possibility, according to a recent Leger survey conducted for RATESDOTCA and BNN Bloomberg.

So, will the anticipated recession hit this year?

RBC economist Carrie Freestone told BNNBloomberg.ca that she believes Canada’s economy is already in a recession, and she expects data set to be released in the coming months will reflect that.

However, she doesn’t believe the recessionary period will extend far into 2024.

In an interview last month, Freestone said she expects gross domestic product (GDP) data for the fourth-quarter of 2023, set to be released in March, will show negative growth. This would follow a 1.1 per cent year-over-year contraction in the third quarter of 2023.

“Our call is for real GDP to decline by about half of a per cent on a quarter-over-quarter annualized basis. By definition, two-quarters of negative growth will mark a recession,” Freestone said in an interview.

She also pointed to unemployment numbers, which have been rising at levels commonly associated with recessions.

In spite of those signs, she said RBC expects the recession “will be contained within the back half of 2023” and not drag out into 2024, with a rebound to come slowly over the course of the year.

James Orlando, senior economist at TD Economics, said recessionary risks are elevated for the year ahead, as the economy has little room to handle potential shocks due to higher interest rates, such as a possible spike in oil prices.

“Right now, we don’t have any of those catalysts in the forecast, but it’s not like they couldn’t pop up,” he said.

CIBC deputy chief economist Benjamin Tal agreed with Freestone that Canada is already in a recession on a per capita basis.

He noted that per capita GDP and consumption are down, and argued that large increases in the population have “elevated GPD growth” and therefore don’t reflect the entire picture.

Looking at 2024, he predicted a “tale of two halves” for economic performance.

“The first half will be mediocre at best, possibly a recessionary period,” he said. “The second half will be much better, that’s when we expect the interest rates to start going down.”

RATE CUT OUTLOOK

Freestone said she, too, expects 2024 will be a “split year,” with economic weakness likely to persist until the Bank of Canada lowers borrowing costs, potentially midway through the year.

Until then, she said Canadians will likely be squeezed financially as they face higher debt servicing costs, higher-rate mortgage renewals and still-elevated inflation in the price of essentials such as food.

“We’re still expecting consumers will be feeling the pinch, at least through the beginning of next year,” she said.

She expects the central bank will start cutting its trendsetting rate – currently set at a two-decade high of five per cent – near the end of the second quarter, with more cuts to come in the third and fourth quarters. It’s possible that cuts could even begin in April, she said.

RBC Economics is projecting Canada’s overnight lending rate will fall one per cent over the course of 2024, according to a December report.

Economists surveyed by Bloomberg are making the same call.

Median estimates project the Bank of Canada’s benchmark interest rate will fall to 4.75 per cent in the second quarter, then to 4.25 per cent in the third quarter before reaching four per cent in the fourth quarter.

Orlando said he expects similar weakness next year with “below trend economic growth through 2024.”

Lower consumer spending will likely slow the economy over the next 12 months, he said, but that trend could start to reverse once the Bank of Canada cuts interest rates – something he predicted could happen as early as April.

“That could start spurring the hesitant consumers to start spending again,” Orlando said of potential rate cuts.

“The first half of 2024 is expected to be much weaker than the second half, where we actually start getting the economic recovery that we’re hoping for.”

Tal predicted interest rates will go down by about 150 basis points this year, potentially starting in May or June, with further cuts to come in 2025.

POPULATION GROWTH 

The only factor keeping Canada’s economy in positive growth territory is robust population growth from immigration, according to Orlando, who pointed out that GDP per capita is “incredibly weak right now.”

“With every new person coming into Canada, that’s a new consumer. That raises the floor for how low the Canadian economy can go when it comes to the probability of a recession,” he said.

Freestone said population growth “insulates demand from a more severe erosion than we’ve been witnessing,” and highlighted that real GDP per capita has been declining for five consecutive quarters.

INFLATION 

As for inflation, which was at 3.1 per cent as of November, Orlando said he thinks the consumer price index (CPI) will move closer to the Bank of Canada’s two per cent target in 2024.

“We think that the headline index, that includes things like food and energy, will break below three per cent quite soon,” he said.

However, he cautioned that core inflation excluding food and energy prices, which has been “has been much more sticky,” may take longer to come down.

“It’s been harder to tame, so that should be getting in around two and a half percent by the second half of 2024,” he said.

Freestone also expects inflation will slow this year.

“We’re expecting that inflation will head towards the middle end of the target range towards the middle of next year,” she said. “We have headline inflation at 2.2 per cent year-over-year by Q2, and down to 1.6 per cent by Q3.”

Supply chains will continue to impact inflation in 2024, Tal contended, though this year they may help to tame price growth.

“It’s very important to not underestimate the impact of the supply chain on disinflationary forces,” he said. “Supply chains were the major inflationary force and now the opposite is the case.”

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