OTTAWA—Now is the time when the full effect of the Bank of Canada’s earliest interest rate hikes in 2022 are starting to take effect. While Canada’s central bank was caught off guard by a surprisingly strong first quarter of economic growth, it expects much weaker albeit slightly positive growth for the rest of the year.
“We’re not forecasting a major contraction. We’re not forecasting large increases in unemployment. And in that sense, it’s not what people associate with the word recession,” Bank of Canada Governor Tiff Macklem told reporters on April 12.
But some economists believe that when the full brunt of the 4.25 percentage points of rate hikes takes effect, the Canadian economy will plunge into a recession.
“We forecast much weaker GDP [gross domestic product] growth in 2023 than the BoC. We expect the economy will slip into recession beginning in Q2 as the full impact of past interest rate hikes work through the economy, credit tightens due to the recent banking sector turmoil, and the U.S. enters recession,” said Michael Davenport, economist at Oxford Economics, in a note.
The BoC projects economic growth of 1.4 percent for 2023—up from 1.0 percent in January. The growth forecast for 2024 fell sharply from 2 percent to 1.3 percent. The bank upgraded its forecast for first-quarter 2023 growth significantly to 2.3 percent up from just 0.5 percent in January.
The timing of economic growth is essentially being shifted into 2023 at the expense of the final quarter of 2022 and calendar year 2024.
Recession Evaluation
Oxford Economics forecasts Canada’s GDP will contract 0.3 percent in 2023.
“Typically, we think that monetary policy has its maximum effect between 12 and 18 months. So we are in that zone where we normally see a lot of effects from past increases in interest rates,” Jean-Paul Lam, University of Waterloo economics professor and former Bank of Canada assistant chief economist, told The Epoch Times.
Housing was the quickest to respond to the rate hikes, and the BoC said real estate activity remains subdued.
Now, as interest rates really start to bite, the bank said big-ticket items are seeing less demand, and business investment is falling.
The labour market, however, is only showing minor signs of any impact from the rate hikes in that shortages are starting to ease, according to the bank’s survey data.
Macklem said a period of weak growth, which is expected in the last three quarters of 2023, is needed to obtain a better balance between supply and demand.
According to economists with the C.D. Howe Institute’s Monetary Policy Committee, expectations for a recession are, while widespread, getting pushed further into the future than early-to-mid 2023, with the severity of it being milder.
