Canada headed for 'severe' and 'inevitable' recession in 2023: economist

Canada is headed for a recession in early 2023, according to one economist.

"I don't think that we're in a recession just yet, but I do think that one is on the horizon," David Doyle, the head of economics at Macquarie Group, told BNN Bloomberg. "Our baseline is that Canada will enter a recession in the first quarter of 2023."

Macquarie Group, an Australia-based global financial services provider, estimates Canada will face an approximately three per cent contraction in gross domestic product (GDP) and a five per cent rise in its unemployment rate during the predicted recession.

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"We actually think it will be pretty severe in Canada," Doyle said. "I think the die has been cast on this front. Because inflation has become so elevated, and unemployment was allowed to fall so low, I think a recession is almost inevitable at this point."

According to new data from Statistics Canada, the Canadian economy grew by a modest 0.1 per cent in July. Their estimates, however, show economic growth stagnating in August, when the annual inflation rate reached 7.0 per cent, down from a high of 8.1 per cent in June.

"I think what you're seeing is that the economy is stalling after having that significant boost from reopening earlier this year," Doyle explained. "I think it's appropriate to think that there's further slowing ahead, even after what looks to have been a very soft third quarter."

Canada's cooling housing market will play a significant role in that slowing, Doyle added. The latest Statistics Canada figures show output from real estate agents and brokers dropping 3.4 per cent in July, down for the fifth consecutive month. Doyle expects the trend to continue.

"Typically, you see housing start to weaken as you head into a recession," Doyle said. "We're certainly seeing ample signs of that."

Aimed at fighting inflation, the Bank of Canada raised interest rates to 3.25 per cent on Sept. 7, which has contributed to the cooling housing market. The increase followed a full percentage point hike in July, which was the largest single rate increase in Canada since August 1998. The Bank of Canada began hiking interest rates in March, after they fell to 0.25 per cent during the COVID-19 pandemic.

Economists widely predict the next interest rate hike will come on Oct. 26. Doyle thinks it could be the last.

"But it will likely be potentially six, nine, 12 months before we start to see the Bank cutting rates again," Doyle said. "That's because they'll want to be certain that they brought inflation under control."

Doyle believes there is a silver lining to the predicted recession.

"Often when you see a recession, it proves to be enough to bring inflation back down," he said.

With files from BNN Bloomberg