How likely is a recession?

Strategists say government, Bank of Canada have low ability and willingness to bail out economy

news analysis

The three economic questions to be asked as the calendar turns to 2023 are how deep a potential recession will get, how much lower inflation will be, and if the Bank of Canada should start cutting rates. That’s what it means.

A recession for an open middle-sized economy like Canada seems inevitable given that the 4% rate hike in 2022 has yet to fully take effect. Cynthia Leach The US, China and the European Union, which account for half of the world’s gross domestic product, are already headed for recession or low growth in 2023.

But Leach said the hurdles for the Bank of Canada to begin cutting rates would be high if a recession hits in early 2023.

“But banks will need to start considering taking the leap at the end of the year, as this year brings further production losses, unemployment and easing core inflation,” she said in a Dec. 8 report.

Could Canada’s Recession Get Worse?

Tony Stilo, Canadian economics director at Oxford Economics, said the downturn in the housing market has pushed Canada into a deeper recession than most of its peers and will last for most of 2023.

The Canadian housing market has long been characterized by a toxic mix of highly indebted households and overvalued housing. The Bank of Canada has frequently warned that rising unemployment could wreak havoc on the housing market, with prices he forecast to fall 30%, according to Stilo.

of Canadian Real Estate Association reported that the actual national average selling price in November was down 12% year-on-year.

Former RBC CEO Gord Nixon He told BNN Bloomberg that he is very negative about real estate, factoring in that household net worth has dwindled, home prices have fallen, and stocks and bonds have had a disastrous year.

But the good news is that economists say job losses will be moderate compared to previous recessions, given the strength of the labor market.

RBC says labor shortages remain a bigger problem than lack of job demand. Wage growth he had accelerated at an annualized rate of 5.6% in November.

Pierre OuimetUBS Canada’s head investment strategist told BNN Bloomberg on Dec. 23 that a mild recession doesn’t really exist and that a 2023 recession is likely due to the diminished ability of governments and central banks to bail out. , said it would be longer than many expected. Economics.

“The reason is the amount of debt and the incompetence of the government. [they] There is no room for fiscal stimulus. And I don’t think the central bank will go back to quantitative easing either.”

In addition to raising rates, the BoC has allowed government bonds purchased to support federal spending, known as quantitative easing, to mature without being reinvested in more government bonds. These are uncharted territory for banks to raise short-term rates and put upward pressure on long-term rates to avoid a recession.

Mr. Ouimet called it “living in the new regime” and said it would be “a bit silly” to cut interest rates significantly.

looney and energy

of BoC In December, it changed its stance, signaling that it may not be necessary to raise interest rates further. However, this affects the Canadian dollar unlike the US Federal Reserve. Economists expect BoC rate hikes to be one or none in 2023.

The Fed is expected to hike more rates than the BoC in 2023, but the end of US rate hikes is in sight, according to BMO chief economist Doug Porter.

of USD It was one of the top stories for financial markets in 2022 given its strength in the first nine months of 2022. He hit a 20-year high at the end of September and is up 19% year-to-date.

Porter said he expects that trend to continue as the US dollar weakened in the fourth quarter and expects Looney to be “moderately profitable.” It will be a force of mild disinflation.

In 2022, energy emerged as a bit of a battlefield as renewable energy plans had to be put on hold to deal with an impending potential energy crisis in Europe. With fossil fuel prices skyrocketing and energy being one of the bright spots in the stock market, Canada’s economy benefited, but far less than it gained from reduced business investment. .

Oil prices are expected to rise next year, according to Amrita Sen, head of research at Energy Aspects.

she said CNBC The price on December 23rd was falling Because of the blockade in China and the US’ use of strategic oil reserves.

But she said China will continue to be the biggest driver of demand, and once the lockdown ends, demand will be huge, creating a multiplier effect across the Asian region.

“When China opens up, you will see feedback loops around the world,” she said.

Post-2023 and the elimination of China

Canada and its allies sought to strengthen their supply chains as supply chain bottlenecks fueled higher inflation following Russia’s invasion of Ukraine in 2022.friend shoring” or “nearshoring”.

But avoiding low-cost producers in a less globalized world means one of the drivers of lower inflation will have less impact going forward.

Bank of Canada Governor Tiff Mackrem summarized his speech to BC’s Business Council on December 12, saying that “Rising geopolitical tensions and a backlash against globalization in some regions have pushed inflation down. It becomes difficult to maintain

In 2022, it will become even clearer to policy makers that Western democracies cannot continue to rely on China, which holds a dominant position in important minerals and resources. active ingredient for pharmaceuticals.

Nixon said the divergence in the global system between traditional Western allies and China will only widen, which will put further pressure on supply chains and friend-shoring and put upward pressure on inflation. .

One supply chain under development in Canada is batteryBut it has to deal with the additional hurdle of China’s dominant position.

“We cannot live in a world where the West is dependent on rare earths from China. Told.

Rahul Vaidyanath

Rahul Vaidyanath is a journalist for The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defense and security. He has worked in Bank of Canada, Canada, Mortgage and Housing, Corporation, Investment Banks in Toronto, New York and Los Angeles.