The Bank of Canada has downgraded its projections for future growth, as Governor Tiff Macklem said he believes the path to a soft landing in the economy has narrowed.

Figures released Wednesday in the Bank of Canada’s Monetary Policy Report project growth in the gross domestic product will reach 1.2 per cent in 2023, then fall to 0.9 per cent in 2024, before rebounding to 2.5 per cent in 2025.

The projections represent a downgrade from what the central bank was expecting in its July policy report, which included growth projections of 1.8 per cent, 1.2 per cent and 2.4 per cent, respectively.

“We’ve been saying for some time that the path to a soft landing is narrow and in this projection, that path has gotten narrower,” Macklem told reporters on Wednesday.

“Our near-term inflation forecasts is a little higher, our near-term output forecast is a little lower. That path is getting narrower, but it is a path where the economy goes through a period of very weak growth and then comes out of that late 2024 and through 2025.”

Macklem made the comments came after the Bank of Canada announced an interest rate hold on Wednesday, after recent data showed a slowdown in the economy and weakening inflation.

The quarterly monetary policy report, also published Wednesday, offered further insight into the central bank’s thinking on the economy.

The report said the downgrade for 2023 came as household spending, forest fires and labour strikes took a bigger toll than previously anticipated, while the 2024 downgrade came from weaker demand for housing due to “past monetary policy tightening and higher long-term interest rates.”

“There’s less excess demand in the economy than we thought, and in fact, our measures of the demand-supply balance in the economy now are kind of mixed, which is what you’d expect as you’re approaching balance,” Macklem said. 

He said the central bank interprets those slowing trends as a reflection of rate hikes sinking into the economy – though he cautioned that “it’s hard to be super precise” about the source of the slowdown.

“Our take is, you’re seeing a little more traction from monetary policy. It was a bit slow in the beginning. The traction has picked up,” he said.

While the projections still show small growth throughout, Macklem said a recession cannot be ruled out, though the Bank of Canada is not forecasting that at this time. 

“There could certainly be some small negative quarters,” he said.

“When people say the word ‘recession’ I think what they have in mind is a steep contraction in output and a large rise in unemployment, that’s not what we’re forecasting.