There's not a clear cut case for the BoC to hike again: BMO chief economist
Now almost halfway through 2023, economists’ predictions for a recession have yet to materialize as data continues to paint a picture of a resilient Canadian economy, despite pressure from high inflation and steep interest rate hikes.
This week’s GDP figures reflected faster-than-expected growth, strong household spending and an early reading of economic growth kicking off the second quarter, adding to the spate of jobs reports that have showed persistent strength in Canada’s labour market.
The surprisingly strong data points have some economists reassessing their past calls for a 2023 recession in Canada. Some say a downturn could still be on the way, though it could be uneven and arrive later than previously expected.
Doug Porter, chief economist at Bank of Montreal, told BNN Bloomberg that the economy has showed “more underlying strength than expected.”
He said it appears “very unlikely” that the broader economy will decline in the second quarter of 2023, despite earlier predictions for a downturn.
“If you think back to the to the start of the year, many forecasters, including ourselves, were calling for at least a mild recession in Canada in 2023, and obviously we're a long ways away from that,” he said in a television interview. “We've seen nothing of the sort.”
Porter said he’s now reluctant to call for a recession at all this year, pointing to excess savings, pent up consumer demand, the strong job market and population growth that are supporting strength in household spending.
“This is a very unique cycle, and I don't think it's really going to be a full-fledged recession,” he said.
Royal Bank of Canada also called for a recession to hit at the midpoint of 2023. Nathan Janzen, RBC assistant chief economist, said a slowdown in the second quarter looks less likely now given Wednesday’s Statistics Canada data and more resilience in the economy than expected.
However, he said RBC’s view remains that hefty interest rate hikes from the Bank of Canada will eventually prompt a mild recession, more likely in the second or third quarter of the year.
“The timing of a slowdown is always tough to predict,” Janzen told BNNBloomberg.ca in a telephone interview. RBC hasn’t officially changed its forecast, but its economists are discussing that now, he said.
“The initial thoughts are move the weakness into second half of the year from the middle of the year.”
Stefane Marion, chief economist at National Bank of Canada said a recession is more likely to materialize in 2024, as companies with lower profit margins compared with a year earlier potentially slow their hiring or cut jobs.
“I think the recession probabilities are higher for next year than they were for this year,” he told BNN Bloomberg in a Wednesday television interview.
“Our best guess at this point in time is that the real softness in Canada and the U.S. will start at the end of Q4 and be much more significant in the first half of 2024.”
A new report out this week from consulting company RSM was still calling for the “strong possibility” of a “brief and mild recession” hitting Canada in 2023, though it said the economy might be spared given the strong indicators so far.
The organization’s quarterly Real Economy Canada report, published Wednesday, pegged the probability of a 2023 recession at 60 per cent. Residential and commercial real estate, commercial retail and energy would be hit hardest if a recession happens, according to RSM chief economist Joe Brusuelas.
“If we have a recession, it's going to asymmetrically impact Canadian industry,” Brusuelas told BNNBloomberg.ca in a telephone interview.
The report said sharp declines in growth that marked the past two Canadian recessions have not materialized, as jobs and industrial sales have remained solid so far this year. But its authors predicted a downtown would still come, “spurred by restrictive monetary policies instead of by a problem with the structural foundation of the economy like what happened in 2008.”
They also pointed to possible spillover effects from Canadian trading partners like the U.S. that also appear poised for “some degree of downturn.”
Based on RSM’s models, Brusuelas said a recession is more likely in 2024, and there is a “non-trivial” chance that Canada avoids a recession altogether.
The report noted that there is a 40 per cent probability that Canada’s economy will be protected by strength in the labour market and experience a soft landing. Brusuelas said the recent GDP data further supported that view.
“That probability that the Canadian economy escapes unscathed here should not be underestimated,” he said.
Janzen noted that the lower-earning segment of the population will be hit harder by a potential slowdown, and many Canadians are already feeling the pinch of higher interest rates and increased cost of living.
“It appears to be a pretty big divergence in impact across the income scale,” he said.