Ottawa urged to rein in spending to avoid undercutting fight against inflation
An International Monetary Fund report is forecasting “substantial” cooling in Canada’s economy. Photo by REUTERS/Yuri Gripas/File Photo An International Monetary Fund report is forecasting “substantial” cooling in Canada over the next year in which “shocks could easily push the economy into a mild recession.”
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In a report Wednesday, IMF staff said growth in Canada is expected to slow to 1.5 per cent in 2023 from 3.3 per cent in 2022. The unemployment rate could rise to above six per cent.
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But the report also warned that the economic outlook could be “substantially worse.” If inflation remains high, the Bank of Canada may have to raise rates further, bringing on a more severe downturn. How the rest of the world, especially the United States, fares will also have an important impact on Canada, it said.
“A mild recession could easily emerge, and the historical distribution of risks suggests a roughly 10-per-cent chance that the economy would contract for 2023 as a whole,” said IMF’s Canadian mission’s annual statement.
Wednesday, economists at Canada’s biggest bank warned that the country is likely fall into recession sooner than they had expected.
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The Royal Bank of Canada had originally predicted the contraction would come in the second quarter, but it now expects a recession early in 2023, as higher interest rates and inflation sap growth.
“Cracks are forming in Canada’s economy,” RBC economists Claire Fan and Nathan Janzen wrote.
Recommended from Editorial A recession in Canada will likely strike sooner than first predicted, Royal Bank says World set for first ‘significant destruction’ of wealth since 2008 financial crisis, says Allianz IMF staff expect the Bank of Canada will take its rate to at least four per cent by the end of this year and leave it there for several quarters, resulting in inflation falling back to the two-per-cent target by the end of 2024. Higher borrowing rates will lead to a 20 per cent fall in home prices, but rising immigration should buffer the decline, they said.
It also urged Canadian governments to support this fight against inflation, by saving revenue windfalls from the commodity boom and avoiding widespread spending increases that would undercut the central bank’s efforts.