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RBC Is Predicting A Recession In Canada For 2023 — Here's What That Would Mean

Many Canadians are already scaling back their spending.

MTL Blog, Associate Editor
Montreal skyline. Right, RBC sign on boul René Lévesque.

Montreal skyline. Right, RBC sign on boul René Lévesque.

Canada's largest bank is predicting that current cracks in the economy will lead to a recession in early 2023. The Royal Bank of Canada warns that a cooling housing market, coupled with low employment levels and rising central bank rates will bring economic downturn sooner than previously thought.
RBC issued its first warning about a "moderate recession" in July, citing inflation and labour shortages as the primary driver. But an October report suggests there's now even more strain on the national economy and that "pressure is still building."

​What are the signs that Canada is headed for a recession in 2023?​

The Royal Bank of Canada cites the recent housing market slowdown, employment lag (down 92,000 over the past four months), and rising bank rates as the main indicators of an upcoming recession. The Bank of Canada raised its overnight rate to 3.75% on October 26 and RBC predicts that number will keep going up well into next year. The central bank has increased its policy rate six times in the past seven months to reduce inflation. Its rate goal is 2%, but will be unlikely to reach that until 2024 at the earliest.

When is a recession expected to hit?

Every time central banks up the interest rate it speeds up the arrival of a recession in Canada. The Bank of Canada is expected to lift the overnight rate to 4% by early 2023, while the U.S. Federal Reserve will likely hike to between 4.5% and 4.75% around the same time, which will have an impact on Canadians. RBC predicts a recession will start in the "first quarter of 2023" — that's a full quarter earlier than its projection in the summer.

What will a recession mean for Canadians?

RBC economists suggest that a recession in in 2023 will mean higher prices and lower buying power for the average Canadian household. Upped interest rates will take $3,000 off the average household’s purchasing power, while the jobless rate is slated to near 7% (less severe than in previous downturns). A recession also means it will be harder to find work, especially for recent grads, employers will be less likely to offer bonuses and small businesses will find it increasingly difficult to compete with larger companies. Start-ups won't qualify for loans as easily, which is only part of the battle, since it will cost more to run a business, due to the rising cost of both services and products.

Who will be hit the hardest by a recession in Canada?

Canadians with a lower income will be impacted most by a recession. Debt-servicing costs will increase and purchasing power will go down. Many are already feeling the pain of high inflation and reducing spending. On the business side, RBC foresees the manufacturing sector being the "first to pull back," while the travel and hospitality industry could prove "more resilient."

According to RBC, interest rate increases are the thing to watch for to assess the likelihood and severity of a recession.

"Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably," said an RBC release.

The bank predicts that the Bank of Canada will stop increasing rates later this year before the Fed follows suit in early 2023. But it said that will only happen if inflation lets up. If not, a deeper recession could be on the horizon.

    Sofia Misenheimer
    MTL Blog, Associate Editor
    Sofia Misenheimer is an Associate Editor for MTL Blog focused on gas prices in Montreal and is based in Montreal, Quebec.
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