Soft landing for Canadian economy becomes ‘a distant prospect’, economists say


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As hawkish central bankers scramble to rein in inflation, more and more economists are coming to the conclusion that a soft landing for the economy is increasingly unlikely.

Since March, the Bank of Canada has raised its rate by 300 basis points and shows no signs of stopping.

“BIS research suggests early rate hikes ‘can help stave off a hard landing,’ RBC senior economist Josh Nye said in a report on Monday. “But with policymakers pledging to do what it takes to contain inflation, we believe a soft landing is becoming a distant prospect.”

Economists had expected the Bank of Canada to raise rates by 75 basis points earlier this month. This rise followed a full one percentage point increase in July and there was speculation that the Bank would pause its most aggressive cycle in a decade at 3.25%.

The policy statement, however, put an end to this theory. “The Governing Council still believes that the policy interest rate will need to rise further,” he said, prompting many economists to raise their interest rate forecasts.

RBC, which previously forecast a 25 basis point hike in October, now expects a 50 basis point hike next month and another 25 basis points in December to take the rate up to 4% compared to its previous forecast of 3.5%.

It comes even as momentum in the economy begins to fade, Nye said. While the Canadian economy posted solid growth in the second quarter, most of it came early in the second quarter, he said. The labor market is also showing signs of slowing, with employment falling for a third consecutive month and the unemployment rate rising.

RBC expects recessions in Canada, the United States, the Eurozone and the United Kingdom over the coming year. In Canada, the slowdown is expected to be moderate, with the unemployment rate rising 1.7 percentage points from trough to peak over the next year and a half, he predicts.

Oxford Economics also expects a 50bps hike in October, followed by a mild recession at the end of 2022, driven by the impact of higher rates, a deepening housing correction and downturns. in the United States and other economies.

“We’ve been warning for some time that an overly aggressive Bank of Canada poses the biggest downside risk to the economy,” said Tony Stillo, director of Canadian economics at Oxford. “We now believe that such a rapid tightening of monetary policy, given Canada’s highly interest rate sensitive economy, as well as a deteriorating external environment, makes a recession the most likely outcome. for the economy.”

The majority of economists in a recent Finder poll agree. Seventy-eight percent now expect a recession, down from 69% in July and 50% in June.

Most believe the slowdown will come in the first quarter of 2023, but 11% say Canada is already in a recession.


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Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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