Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023.
The jobless rate will rise next year but to less severe levels than in previous downturns.
Though higher rates will restrict growth, they’re necessary to tame inflation and cool an overheating economy.
Household spending that accelerated out of pandemic lockdowns will slow as higher prices, interest rates and unemployment hit households.
The bottom line: This recession will be moderate and short-lived by historical standards—and can be reversed once inflation settles enough for central banks to lower rates.
In Canada, economic pressures are closing in
When you’re at the top of the hill the only way to go is down. Canada’s economic growth has fired on all cylinders following pandemic shutdowns. But a historic labour squeeze, soaring food and energy prices and rising interest rates are now closing in. Those pressures will likely push the economy into a moderate contraction in 2023.
Canadians continue to fuel a recovery in the travel and hospitality sectors. And higher global commodity prices have boosted the mining sector. But businesses are struggling to find the workers they need to expand production. There were nearly 70% more job openings in June than before the pandemic—and those hunting for staff were forced to compete for almost 9% fewer unemployed workers. Meantime, soaring prices are cutting into Canadians’ purchasing power at the pump and the grocery store.
This recession won’t be as severe as prior downturns
Both in Canada and abroad, central banks are aggressively hiking rates to slow household demand and fight inflation. In Canada, much of the price pressure is coming from beyond our borders, as energy and agricultural prices surge on supply chain snarls stemming partly from the Ukraine war.
Strong domestic demand for housing and services has intensified these pressures and the labour crunch is driving wages higher. The Canadian unemployment rate is now almost a full percentage point below RBC’s assumption of its longer-run neutral (non-inflationary) level. As the economic contraction plays out next year, that rate will likely rise another 1 ½ percentage points to 6.6%.
These job losses will come at a time when Canadians are already grappling with higher prices and debt servicing costs (factors that have hit lower income households the hardest). Still, by historical standards, we expect the slowdown to be modest. Indeed, a 6.6% unemployment rate would still be more than 2 percentage points below the 8.7% peak in the 2008/09 recession.
Higher rates are key to reining in inflation expectations
Though higher rates will technically push Canada toward a contraction, the Bank of Canada now has little choice but to act. Inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations. Higher inflation expectations can become self-fulfilling, making businesses more likely to pass on cost increases and consumers more willing to pay for them (and demand higher wages). A scenario in which Canadians believe inflation will run well past the bank’s target range of 1 to 3% could upend almost three decades of exceptionally effective inflation targeting policy. It could also require much larger and more damaging interest rate hikes to re-anchor prices.
Higher 5-year inflation expectations drove the U.S. Fed’s decision to hike rates by 75 basis points in June. With the BoC confronting a similar increase, a hike at least as large is likely in Canada on July 13th. And neither bank is done. The U.S. Fed and the BoC are expected to lift rates to 3.5% and 3.25% respectively, by the end of 2022. That’s high enough to significantly restrict growth, particularly in Canada, where household debt is very high.
Slowing growth abroad will spill over into Canada
Even without rate hikes, labour shortages in Canada and abroad are preventing expansion. The U.S. economy contracted in Q1 and though we’re tracking a small increase in Q2, it wouldn’t take a major forecast miss to have a second quarter of negative growth. We expect the U.S. unemployment rate to rise to 4% by year’s end and climb to almost 5% in 2023. Meantime, emerging markets will struggle with higher food and energy prices, elevated borrowing costs and a strong U.S. dollar. And pandemic disruptions continue to curb growth in China.
These slowdowns in external demand will drag on Canadian growth.
The boom in household spending will flag later this year
Canadian households have socked away over $300 billion in savings since the end of 2019. That’s boosting spending—and adding more inflation pressure.
But the lion’s share of savings remain with higher income households, leaving lower income groups more vulnerable to rising rates and prices. Housing markets have softened dramatically, with prices swinging from record highs over the winter to declines in the spring. We expect house prices to fall 10% in the year ahead, subtracting over $800 billion from household net worth.
That would only partially retrace the $2.4 trillion surge in real estate equity since 2019. Still, it will leave Canadians feeling “less wealthy” prompting them to spend less in the housing market and elsewhere.
Rate hikes will reverse but not until inflation cools
Global inflation pressures may soon peak. Shipping costs have declined. And exceptionally strong demand for goods—which has sparked supply chain challenges and higher input costs—is moderating as consumers in Canada and abroad shift spending to services that weren’t available during pandemic lockdowns. Much of the surge in wheat prices following Russia’s invasion of Ukraine has reversed.
Prices are still rising too fast and inflation won’t slow sustainably until demand falls. But once that happens, central banks will ease interest rates again. Meantime, a slowdown both in Canada and abroad will help temper inflation. A 6.6% unemployment rate in Canada next year wouldn’t be far above long-run ‘full-employment’ levels. We don’t think it’ll take long to unwind that weakness in 2024 and beyond.
View the RBC Economics forecasts for Canada and the U.S.
Nathan Janzen is a member of the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.
Claire Fan is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators on GDP, labour markets as well as inflation for both Canada and the US.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
Disney shares are up 5% following Wednesday’s third-quarter earnings report that surpassed expectations, largely due to higher spending at the company’s domestic theme parks.
But might Disney’s success also say something about the current state of the U.S. economy? Experts often view Disney’s theme parks as bellwether economic indicators, as the Financial Times explained several years ago. Essentially, the theory goes that when budgets tighten, families cancel trips to Disney theme parks. That does not appear to be happening right now.
What a difference a year makes. This time last summer, most of Disney’s theme parks were running at reduced capacity due to the pandemic and Disney Cruise Line was not operating at all.
Flash forward to Wednesday’s earnings call, where company executives announced that revenue for Disney’s parks, experiences and products division rose by more than $3 billion and operating income increased by $1.8 billion compared to the same period in 2021. The increase was driven by jumps in theme park attendance, occupied room nights at Disney’s on-site hotels and cruise bookings.
“Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels.”
“All of our theme parks are now open,” said Disney CEO Bob Chapek on the earnings call, noting that the company has ramped up capacity on a phased basis and brought back many of the experiences that families love, such as character meet-and-greets, fireworks spectaculars and theatrical performances.
“Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels,” said Christine McCarthy, Disney’s chief financial officer. “We have not yet seen demand abate at all and we still have many days when people cannot get reservations.”
The second was the expansion of the Disney Cruise Line fleet with the brand new Disney Wish ship, which is powered by liquefied natural gas. The cruise business “has been the most severely impacted by Covid in terms of duration of disruption to the business,” noted McCarthy. “But we have a competitive position overall in the cruise business, especially the family cruise market, so we generate pricing that’s well above the industry average.
The third big milestone was the opening of the Marvel-themed Avengers Campus at Disneyland Paris. “Guests are responding in a big way to our enhanced offering at Disneyland Paris’ per capita spending in Q3 was up over 30% versus 2019, a great sign of the site’s potential for growth,” said Chapek.
The strong performance in the third quarter of Disney’s resort in France was partially offset by closure-related impacts at its Shanghai resort, where the theme park was closed for all but the last three days of the quarter.
Though the average daily attendance at domestic Disney parks was down slightly compared to 2019, per capita spending is up 10% compared to last year and is 40% higher than fiscal 2019.
Higher per-person spending was driven in part by the Genie+ and Lightning Lane features introduced last year to replace the old FastPass system. With the new system, parkgoers can pay extra to bypass lines for the most popular attractions. “Now about 50% of the people that come through the gate actually buy up to that Genie product, which I think you can see the result of in our yields,” said Chapek.
McCarthy acknowledged that international visitors, which historically have accounted for up to 20% of total guests, have been slow to return to the U.S. parks. “During the pandemic, international visitation to our domestic park — primarily Walt Disney World — was basically nonexistent,” she said. “But it’s made significant progress, and we expect the international visitation, when it is fully back, to actually be additive to margins because those guests tend to stay longer at the parks, and they spend more money when they’re there as well.”
Disney’s rebound is about more than pent-up demand following the darkest days of the pandemic, said Chapek. “What we’re seeing is far more resilient, far more long lasting in terms of increase in the affinity for our parks, both from the willingness to come to our parks and its attendance, but also in terms of what guests are willing to spend when they get there in order to personalize their experience.”
NEW DELHI (AP) — As India’s economy grew, the hum of factories turned the sleepy, dusty village of Manesar into a booming industrial hub, cranking out everything from cars and sinks to smartphones and tablets. But jobs have run scarce over the years, prompting more and more workers to line up along the road for work, desperate to earn money.
Every day, Sugna, a young woman in her early 20s who goes by her first name, comes with her husband and two children to the city’s labor chowk — a bazaar at the junction of four roads where hundreds of workers gather daily at daybreak to plead for work. It’s been days since she or her husband got work and she has only five rupees (six cents) in hand.
Scenes like this are an everyday reality for millions of Indians, the most visible signs of economic distress in a country where raging unemployment is worsening insecurity and inequality between the rich and poor. It’s perhaps Prime Minister Narendra Modi’s biggest challenge as the country marks 75 years of independence from British rule on Monday.
“We get work only once or twice a week,” said Sugna, who says she earned barely 2,000 rupees ($25) in the past five months. “What should I do with a life like this? If I live like this, how will my children live any better?”
Entire families leave their homes in India’s vast rural hinterlands to camp at such bazaars, found in nearly every city. Out of the many gathered in Manesar recently, only a lucky few got work for the day — digging roads, laying bricks and sweeping up trash for meager pay — about 80% of Indian workers toil in informal jobs including many who are self-employed.
India’s phenomenal transformation from an impoverished nation in 1947 into an emerging global power whose $3 trillion economy is Asia’s third largest has turned it into a major exporter of things like software and vaccines. Millions have escaped poverty into a growing, aspirational middle class as its high-skilled sectors have soared.
“It’s extraordinary — a poor country like India wasn’t expected to succeed in such sectors,” said Nimish Adhia, an economics professor at Manhattanville College.
This year, the economy is forecast to expand at a 7.4% annual pace, according to the International Monetary Fund, making it one of the world’s fastest growing.
But even as India’s economy swells, so has joblessness. The unemployment rate remains at 7% to 8% in recent months. Only 40% of working age Indians are employed, down from 46% five years ago, the Center for Monitoring the Indian Economy (CMIE) says.
“If you look at a poor person in 1947 and a poor person now, they are far more privileged today. However if you look at it between the haves and the have nots, that chasm has grown,” said Gayathri Vasudevan, chairperson of LabourNet, a social enterprise.
“While India continues to grow well, that growth is not generating enough jobs – crucially, it is not creating enough good quality jobs,” said Mahesh Vyas, chief executive at CMIE. Only 20% of jobs in India are in the formal sector, with regular wages and security, while most others are precarious and low-quality with few to no benefits.
That’s partly because agriculture remains the mainstay, with about 40% of workers engaged in farming.
As workers lost jobs in cities during the pandemic, many flocked back to farms, pushing up the numbers. “This didn’t necessarily improve productivity – but you’re employed as a farmer. It’s disguised unemployment,” Vyas said.
With independence from Britain in 1947, the country’s leaders faced a formidable task: GDP was a mere 3% of the world’s total, literacy rates stood at 14% and the average life expectancy was 32 years, said Adhia.
By the most recent measures, literacy stands at 74% and life expectancy at 70 years. Dramatic progress came with historic reforms in the 1990s that swept away decades of socialist control over the economy and spurred remarkable growth.
The past few decades inspired comparisons to China as foreign investment poured in, exports thrived and new industries — like information technology – were born. But India, a latecomer to offshoring by Western multinationals, is struggling to create mass employment through manufacturing. And it faces new challenges in plotting a way forward.
Financing has tended to flow into profitable, capital intensive sectors like petrol, metal and chemicals. Industries employing large numbers of workers, like textiles and leather work, have faltered. This trend continued through the pandemic: despite Modi’s 2014 ‘Make in India’ pitch to turn the country into another factory floor for the world, manufacturing now employs around 30 million. In 2017, it employed 50 million, according to CMIE data.
As factory and private sector employment shrink, young jobseekers increasingly are targeting government jobs, coveted for their security, prestige and benefits.
Some, like 21-year-old Sahil Rajput, view such work as a way out of poverty. Rajput has been fervently preparing for a job in the army, working in a low-paid data-entry job to afford private coaching to become a soldier and support his unemployed parents.
But in June, the government overhauled military recruitment to cut costs and modernize, changing long-term postings into four-year contracts after which only 25% of recruits will be retained. That move triggered weeks of protests, with young people setting vehicles on fire.
Rajput knows he might not be able to get a permanent army job. “But I have no other options,” he said. “How can I dream of a future when my present is in tatters?”
The government is banking on technology, a rare bright spot, to create new jobs and opportunities. Two decades ago, India became an outsourcing powerhouse as companies and call centers boomed. An explosion of start-ups and digital innovation aims to recreate that success – “India is now home to 75,000 startups in the 75th year of independence and this is only the beginning,” Minister of Commerce, Piyush Goyal, tweeted recently. More than 740,000 jobs have been created via start-ups, a 110% jump over the last six years, his ministry said.
There’s still a long way to go, in educating and training a labor force qualified for such work. Another worry is the steady retreat of working women in India — from a high of nearly 27% in 2005 to just over 20% in 2021, according to World Bank data.
Meanwhile, the stopgap of farming appears increasingly precarious as climate change brings extreme temperatures, scorching crops.
Sajan Arora, a 28-year-old farmer in India’s breadbasket state of Punjab, can no longer depend on ancestral farmland his family has relied on to survive. He, his wife and seven-month old daughter, plan to join family in Britain and find work there after selling some land.
“Agriculture has no way forward,” said Arora, saying he will do whatever work he can get, driving a taxi, working in a store or on a construction site.
He’s sad to leave his parents and childhood home behind, but believes the uncertainty of change offers “better prospects” than his current reality.
“If everything was right and well, why would we go? If we want a better life, we will have to leave,” he said.
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