Deloitte is forecasting an economic contraction in Canada in the months ahead.

The firm’s 2023 Economic Outlook report released on Tuesday cited the Bank of Canada’s aggressive stance on monetary policy and an expected recession south of the border as the driving forces behind the cool down. 

“Our forecast predicts the steady diversion of household income toward interest payments and a U.S. recession will push down Canadian economic growth for three consecutive quarters, resulting in an overall contraction of 0.9 per cent,” the report said. 

While the report assumes the BoC’s rate-hiking cycle has come to end, it stated the full effects are yet to be reflected.

The BoC hiked interest rates seven times in 2022 in an attempt to cool the country’s runaway inflation. The overnight rate now sits at 4.25 per cent, the highest it has been since the 2008-2009 financial crisis.

“The biggest risk is that the past year’s interest rate increases will be more consequential than anticipated, leading to a deeper and more protracted downturn,” it said.

Despite the call for an economic downturn, Deloitte noted the pullback won’t be as harsh as past recessions.

“While all this may sound quite dire, we still expect the recession will be relatively mild and short-lived by historical standards,” it stated. 

CONSUMER IMPACT

Household spending pulled back dramatically in the third quarter of last year as means of dealing with increased rates, the report stated. Canadian households were forced to spend more of their income on debt-servicing while also experiencing diminished purchasing power amid the increased cost of living, it revealed.

Debt-carrying costs increased by 16.2 per cent in the third quarter of 2022, or $16.4 billion on interest payments – marking the largest jump on record, the report showed.

“From an economics point of view, because consumption is the largest contributor to our gross domestic product (GDP), that $16.4 billion being redirected away from spending and saving is creating a notable headwind to growth,” it said.

Historically, recessions have often led to job losses as businesses become more cautious of spending. However, Deloitte does not foresee an overall decline in Canadian employment ahead as labour shortages persist.

 “Given these tight labour market conditions, we don’t expect employment to decline overall,” it said.

HOUSING

Interest rate hikes have also significantly cooled Canada’s housing market.

The actual national average home price in Canada was $632,802 in November 2022, down 12 per cent compared to the same month last year, according to the Canadian Real Estate Association. Home sales were also down 3.3 per cent for the month, the data showed.

Deloitte is calling for this weakened housing activity to continue over the next two years, with a forecast of a 7.9 per cent drop in residential investment in 2023. 

“Despite an expected pause in interest rate increases, mortgage rates will remain elevated until the end of 2023, preventing many prospective homebuyers from entering the market and leading to further declines in home ownership transfer costs,” the report said.

The drag will also be seen in investments for home renovations, home furnishings and appliances, it said.

BLOW FROM THE U.S.

The report also cautioned that a weakened U.S. economy would hurt Canada.