David George-Cosh

Reporter

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Amid deteriorating global economic conditions, the Canadian government took the rare step of outlining how a “hard landing” and a potential recession in early 2023 would impact Canada’s economy in the Fall Economic Statement released Thursday.

Canada’s Department of Finance modelled the various fiscal projections in light of recent developments such as persistent inflationary pressures and ongoing monetary policy moves that may weigh on the country’s near-term growth forecast. In that scenario, finance officials assumed that inflation – currently at 6.9 per cent in Canada but down from a record-high of 8.1 per cent – would become more deeply entrenched, forcing central banks to raise interest rates by more than what may have been anticipated.

“Tighter financial conditions result in more adverse effects on confidence, wealth and activity, resulting in a sharper correction in housing markets and consumer activity in Canada, as well as larger spillovers from tightening and weaker economic activity in other countries," according to the Fall Economic Statement.

If a “hard landing” were to happen, finance officials forecasted that inflation would remain stubbornly high throughout 2023 and remain above three per cent until the first quarter of 2024 before hitting the Bank of Canada’s mandated target of two per cent by the end of 2024. That would push the Bank of Canada to raise interest rates to 4.5 per cent in the first half of next year (they are currently at 3.75 per cent) and would push Canada into a mild recession in the first quarter of next year.

That modelled recession would see Canada’s economy contract by as much as 1.6 per cent, below the 4.4 per cent contraction seen in 2008 to 2009, while the country’s unemployment rate would rise by 1.7 percentage points to 6.9 per cent by the latter half of next year. Much of that contraction would come from a decline in income tax revenues, projected to be $10 billion less than first expected, as weaker commodity prices and lower forecasted nominal gross domestic product weigh on corporate profits and personal incomes.

Weaker global demand would also see a noted decline in oil prices next year to US$80 per barrel, down slightly from the US$88 per barrel mark that was expected in the Finance Department’s survey of private sector economists released in September. The Canadian dollar would also remain weaker relative to its U.S. counterpart during a recession, with finance officials seeing the loonie trade at 73 cents in the next fiscal year, roughly four cents lower than if a hard landing doesn’t happen.

Finance officials also expect a recession to lead to a $6 billion increase in Canada’s debt charges thanks to sustained higher interest rates. In total, an average of $16 billion is expected to be added to the deficit in a downside scenario, pushing the federal debt-to-GDP ratio 3.3 percentage points higher at 40.6 per cent by fiscal 2027-28.