RBC recession forecasts encourage controversy


The Royal Bank of Canada predicts a short-term recession in the Canadian economy in 2023. Predictive economists say it’s not unreasonable, but uncertain.

RBC analysts Nathan Janzen and Clairefan forecast negative GDP growth of 0.5% in the second and third quarters of 2023. This is considered a recession. This is the time of recession, indicated by negative GDP growth for the second consecutive quarter.

“Inflation, labor shortages and rising interest rates will drive Canada’s growth and drive the economy to a gradual contraction in 2023 … Household spending accelerated from the pandemic blockade will drive prices, interest rates and unemployment. The rise will slow down as it hits the household. ” Analyst wrote July 7.

“This recession is moderate and short-lived by historical standards and can be undone once the central bank has settled enough inflation to lower interest rates.”

Other major banks forecast a recession, according to a comparison of 2022 and 2023 forecasts issued by RBC, Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank (NB) by CD Howe. not. Toronto-Dominion Bank (TD) and Nova Scotiabank (BNS).

For the rest of 2022, BMO forecasts GDP to be zero in the final quarter, and BMO, CIBC, and NB forecast GDP growth for the third quarter of this quarter to be 1.5, 1.5, and 1.6, respectively. It is the lowest at%.

Robert Kavcic, senior economist at BMO, acknowledges that RBC scenarios are possible.

“It’s rational, and in fact, we’ve already significantly reduced our own growth prospects in the last few weeks,” he said in an interview.

“Although not technically a recession, Canada’s economic growth has virtually stagnated at the turn of the year, with real GDP growth in the fourth quarter of 2022 unchanged. [0 percent] And 2023Q1 [0.5 percent]”Kavcic explained.

“In other words, we think there is a significant risk that the economy is actually showing a technological recession. Otherwise, interest rates will rise, housing activity will slow down, and inflation will dig into buying power. It is clear that there is a risk that actual economic growth will cool significantly as companies become more cautious. “

Michael Devrew, a professor of economics at the University of British Columbia, states that RBC’s recession forecasts are “pessimistic” rather than “not necessarily unrealistic.”

“Current indicators of the Canadian economy are still strong, but consumers are spending steadily, businesses are increasing employment and planning to increase production in the near future, but there is a considerable dark cloud on the horizon. “Devreux told The Epoch Times.

“First and most importantly, the Bank of Canada plans to raise interest rates significantly in the next six to nine months, with almost all predictors saying it will rise by 75 basis points starting next week. This could be followed by another 50 basis points later this year and another 1 basis point at the end of the year. “

He points out that the sector in which this has the greatest impact is the housing market.

“Mortgage rates are set to rise tremendously, and given the size of Canada’s mortgage debt today, housing demand should be significantly curtailed next year or so, which is inevitable. Will slow economic growth. The importance of this sector to the economy as a whole. “

Low productivity growth

Steve Ambler, a professor of economics at the University of Montreal, says the certainty of a recession is “not an easy matter.” But he sees “two possible mechanisms” to shrink Canada’s economy.

“In the beginning, many people bought big homes during the pandemic and made the most of their mortgage payments. If there was a variable interest rate mortgage that couldn’t be renewed for another four years, it would increase debt repayment costs. They will face. They may have to reduce their discretionary spending on others, which leads to a weakening of consumer spending, “Ambler told the era.

“Second, the United States experienced negative growth in the first quarter, with some [saying they just had] Another negative quarter. Negative growth south of the border means weak export demand, “affects Canada.

Bank of Canada’s move will also affect whether growth will be negative, Ambler said.

“A rise in overnight rates enhances both effects through higher debt repayment costs and higher exchange rates. The latter has night charges. [U.S.] Federal funds rate. On the other hand, the faster the fate of federal funding, the more likely the US economy will be in recession. “

He added that high growth in public spending and high deficits “fund the congestion of private investment.”

“Innovation is so slow and business investment is poor, so we’re in an era of low productivity growth,” says Ambler. “The Liberal Party government, which is doing its best to kill the fossil fuel industry, is also of little use.”

‘Soft landing’

Balancing may be too much to work. In another RBC analysis,Reduced runway for soft landing“Senior economist Joshnai wrote on July 7th. Rapid economic recovery. “

Devereux agrees.

“This is not certain. The best scenario is that inflationary impulses due to energy increases and supply chain blockages will ease by the end of the year, and consumer spending will gradually cool, causing the internal demand that is driving inflation to contract naturally. And the Bank of Canada will be able to slow or stop the rise in interest rates, “he explained.

“This is what we call a” soft landing. ” You can only do what you want. “

Kevin Beirne, an analyst at S & P Global, said supply chain issues and high energy and commodity prices could hinder growth.

“The punch line is that inflationary pressure controls economic growth. [consumers’] Disposable income is affected as all costs increase.And depending on how … it [will] Progress later this year could have serious headwinds for economic growth, “Barn said in an interview.

“We have a lot of global uncertainty that comes from the Russian invasion, which also slows economic growth as consumers are starting to have money because they are not confident in spending everything. It’s possible. It can cause an economic slowdown. Growth slows because we just don’t spend money. “

In response to an email from The Epoch Times, Trevor Tombe, a professor of economics at the University of Calgary, said he and no one else had a credible prophecy.

“I don’t think I have much insight,” he writes. “It’s certainly a concern shared by many, but economists generally tend to think they’re not good at predicting recessions, so don’t put too many stocks in those reports.”

Lee Harding


Lee Harding is a Saskatchewan-based journalist and think tank researcher and contributor to The Epoch Times.