Canada’s economy faces ‘headwinds”

The leading economist from the International Monetary Fund (IMF) has recently said Canada is facing high inflation, weak growth and anxiety in financial markets, which have been also the challenges that are dragging down the global economic outlook.
Image for illustration (Photo: Reuters)
Image for illustration (Photo: Reuters)

Amid rising interest rates and economic uncertainty, Canadian consumers seem to prepare for an economic recession scenario in 2023, with many plans for “austerity”.

Like other central banks, the Bank of Canada (BoC) has aggressively raised interest rates this year to form price stability, towards its 2% inflation target.

The Consumer Price Index (CPI) in Canada increased by 6.9% year-on-year in September, slightly lower than the 7% reported in the previous month, said Statistics Canada.

With the current inflation situation, economists forecasted that there will be more rate hikes to reduce demand and cool down the economy.

However, successive interest rate hikes by the BoC have been tightening the Canadian economy, especially interest-sensitive sectors such as the housing market. In September, nationwide home sales fell 3.9% from the previous month, while Home Price Index fell 1.4%, according to the Canadian Real Estate Association. Interest rate hikes raise borrowing costs for businesses and consumers, causing shockwaves through the economy and hurting many households.

According to Pierre-Olivier Gourinchas, the IMF's leading economist, Canada's economy performed well during the recovery period, but was affected by headwinds that are affecting the global economy. The IMF assessed that the world economy has been slowing down more broadly and more sharply than expected, with the growth rate likely to slow to 2.7% in 2023, compared with 3.2% this year.

According to the IMF, the Canadian economy will only grow by 1.5% in 2023, when it is "squeezed" from all sides: the US economy in danger of slowing down, prices of many goods, including energy, falling, and financial tightening trends and tensions pervading many markets. Gourinchas also said central banks around the world have responded to rising inflation by raising interest rates. It was part of a mission to keep prices in control, but the policy will hurt economies. He warned that when the economic growth slows down, the unemployment will rise.

The Government of Canada acknowledged the difficulty in tightening monetary policy. Canadian Prime Minister Justin Trudeau commented on the uncertain outlook for the economy and said that many people are facing a challenging period. Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland warned that the coming months will not be smooth as rising interest rates slow down an overheated economy.

The Bank of Nova Scotia has become the latest financial institution to forecast a recession in the near future as it predicted that Canada will experience a "technical recession" in the first half of 2023.

Preparing for the possibility that the Canadian economy is about to enter a recession, Canadians have plans to cut spending or delay big purchases.

According to a survey for consumers and businesses conducted by the BoC, pessimism is widespread in the economy, with the majority of respondents forecasting the country will slip into a recession next year and they will tighten their wallet. A recent report by the Royal Bank of Canada (RBC) showed that middle-income households will lose 3,000 CAD in purchasing power this year due to the increase of both prices and interest rates rise.

The BoC Governor Tiff Macklem said that the path for the Canadian economy to avoid a recession scenario is narrowing, but the BoC will continue to raise interest rates even if the economy decelerates and the risk of instability in the financial market increases. Governor Macklem stated that the Canadian economy is still growing too hot, with demand exceeding supply. The BoC needs to cool down the economy and reduce inflation.

According to Governor Macklem, more needs to be done to bring demand back in line with supply, particularly in the labour market. Bringing inflation back to the annual target of 2% requires a period of slower economic activity. These observations showed that Canada continues to accept the trade-off of growth to contain inflation.