Will Canada avoid a recession?

Deloitte Canada offers its prediction

Will Canada avoid a recession?

Canada appears poised to avoid a full-blown recession despite the strain of higher interest rates, according to a new economic outlook report from Deloitte Canada.  

The nation’s economy will likely “remain stuck in neutral” throughout much of 2024, with growth rebounding more significantly in 2025.

However, the report warns of several worrisome trends weighing on the economy, including lingering inflation, increasing business insolvencies, and a rise in mortgage delinquencies.

“Against this backdrop, we remain cautious about the near-term outlook,” Deloitte said in its report. “But based on its current trajectory, Canada appears likely to skirt a recession and even seems poised to begin recovering from its current slump in the second half of this year.”

The path to recovery hinges on the Bank of Canada’s response to inflation. After taking aggressive steps in 2022 to raise the key interest rate from near zero to 5%, signs of cooling inflation have prompted Deloitte to forecast interest rate cuts beginning as early as June. This aligns with expectations from most economists for rate cuts starting in June or July.

While the economy is expected to grow by a modest 1% this year, Deloitte forecasts stronger 2.9% growth in 2025. This optimism hinges on factors including continued US economic growth, softening inflation, the Bank of Canada’s anticipated rate cuts, and a steady flow of immigration to support demand.

Recent Statistics Canada data, showing 0.6 % GDP growth in January and a preliminary 0.4% estimate for February, support these projections.

Deloitte emphasized the importance of rate cuts for a true economic recovery, stating: “The good news is that measures to cool inflation have made significant progress. That being said, the factors that are keeping inflation elevated are not likely to reverse in the near term.”

Housing remains a significant hurdle, particularly as Canadians renew mortgages at higher rates and renters face increasing costs. Additionally, wage pressures that outpace productivity gains continue to complicate inflation control.

“Further, wage pressures continue to run well above inflation without any commensurate increase in productivity, and that is driving up unit labour costs for businesses and making it difficult to contain inflation,” the report said.

Read more: Canada’s economy isn’t reaching full potential, says BoC’s Rogers

Despite these challenges, the labor market remains a bright spot, although Deloitte predicts job growth will slow sharply in 2024. Consumers are likely to keep spending modestly in the first half of this year but are expected to “unleash pent-up demand” in 2024 as rates drop and the economy improves.

“Next year should be much better as interest rates come down, the economy picks up, and pent-up demand is unleashed,” Deloitte said.

The firm also expressed concern over a “worrying” decline in business investment.  Elevated interest rates suppress growth and erode business confidence. 

“To cope with softer demand and tighter credit conditions, businesses are increasingly delaying their investment plans, focusing more on maintenance and repair rather than expanding operations,” the report read.

In contrast to Canada, the US economy has weathered interest rate hikes relatively well.  Though moderation is expected, Deloitte forecasts continued positive US growth, with 2.4% real growth in 2024 and 1.4% in 2025.

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