This will particularly affect the Bank of Canada's rate-hike trajectory, Scotiabank says
A potent combination of internal and external factors is likely to trigger a “technical recession” in Canada next year, according to Jean-François Perrault, senior vice president and chief economist at Scotiabank.
“Lower commodity prices, elevated uncertainty, lower equity values, and a weaker US are all acting as brakes on growth,” Perrault said.
Scotiabank is now expecting growth to slow from 3.2% in 2022 to 0.6% in 2023.
Read more: Bank of Canada sees worst drop in business outlook since 2020
This has serious implications on the central bank’s rate-hike trajectory, Perrault said.
“The Bank of Canada will need to tighten rates to 4.25% by the end of this year and keep rates at that level through much of 2023,” Perrault said. “This, along with weaker US growth, largely accounts for the negative revision to the outlook.”
This level is significantly higher than Scotiabank’s previous terminal rate forecast of 3.75%, an adjustment that is a reflection of “the fiscal support measures being rolled out domestically, as well as the impact of a rapidly depreciating Canadian dollar.”
“Both developments will put upward pressure on inflation, though we take comfort from the fact that there are some signs that inflation is moderating in Canada, in contrast to the US,” Perrault said.
Scotiabank pegged Canadian inflation to average 6.9% in 2022 and slow to 3.9% in 2023.
“The BoC’s inflation target is unlikely to be reached until 2024 and should mildly undershoot the target in the second half of 2024,” Perrault said, while also warning that “the global outlook continues to hinge critically on inflation.”
“If inflation shows no signs of moderation in the coming months, policy makers would likely need to engineer a great slowdown in economic activity to bring inflation under control.”