A "mild downturn" is in the cards for 2023, banking giant says
While credit conditions should tighten less in Canada than elsewhere in North America, the economy is unlikely to avoid a “mild downturn”, according to BMO Economics.
This is despite the strong labour market activity during the first two months of the year.
“After real GDP stalled in Q4 due to a large decline in business spending and less inventory investment, the economy likely turned upwards in Q1,” BMO said in a new analysis.
Existing home sales also registered its strongest ever annual growth for the month of February, “benefiting from lower prices and the central bank’s pause signal,” BMO added. “While sales are still down 40% y/y, they look to have bottomed. The robust data partly reflect milder temperatures, but excess household savings also help.”
However, the ongoing global financial stress is likely to have more apparent knock-on effects for the Canadian economy moving forward.
“While interest rates haven’t risen as much as in the US, households are more sensitive due to larger debts and shorter mortgage terms,” BMO said. “With policy rates now the highest since 2007, many younger mortgage holders haven’t experienced high borrowing costs and will be compelled to cut back on discretionary spending.”
Considering these developments, BMO is anticipating real GDP growth to decelerate from 3.4% in 2022 to 0.7% in 2023, before recovering to 1.3% in 2024.
“The unemployment rate should rise about one percentage point to 5.9% at year-end, a modest increase compared with past recessions,” BMO predicted.
The Bank of Canada is also likely to maintain its “conditional pause” on its policy rate (currently at 4.5%), which will come as a bit of relief for consumers, BMO said.
“The recent financial turmoil … should dissuade any thoughts of hiking on April 12,” BMO said. “We still expect no further policy changes this year, with rate cuts likely to begin by early next year.”