RBC predicts a “mild” recession for Canada in the middle of this year

According to RBC economists, the Canadian economy will face a recession in the second and third quarters of 2023.

It’s a more specific timeline than in case of RBC’s previous forecasts, even though the national economic growth “has turned out to be more resilient than feared amid aggressive interest rate hikes” that started in 2022.

The economists expect higher central bank interest rates to keep affecting the economy in 2023, reducing household purchasing power and restraining the real estate market. Meanwhile, they also say the global manufacturing outlook has softened and eased supply chain disruptions contributing to an inflation slowdown.

“Under such circumstances, the most likely scenario is a mild recession for the U.S. and Canadian economies during the middle quarters of 2023,” – the report noted.

RBC believes any recession will “stay on the ‘mild’ side of historical downturns,” although the economy won’t be able to avoid a bumpy landing fully.

Consumer spending may appear to be less sensitive to interest rate increases than expected, the report says, but that would keep inflation pressures strong and cause more rate hikes. The latter will eventually reduce household purchasing power, “postponing but not canceling a downturn.”

In economists’ opinion, consumer demand needs to ease in order for inflation to get back to the Bank of Canada’s target level of 2%.

“No region of the country will be protected from the stronger economic challenges,” – RBC’s report says, expecting significantly slower economic growth in all provinces except Newfoundland and Labrador, as they are benefiting from growing offshore oil production.

RBC says the oil-producing provinces of Saskatchewan, Alberta, and Newfoundland and Labrador will lead the way mostly due to high commodity prices.

British Columbia, Ontario, and Quebec are facing less optimistic outlooks, as higher household debt service costs and corrections in the real estate markets there are showing a stronger economic influence.

At the same time, Atlantic Canada is growing faster than the national average due to high population growth and residential investment.