Canada heading for a short and moderate recession in 2023, says RBC

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Canada heading for a short, moderate recession in 2023, says RBC

Royal expects that the unemployment rate reaches 6.6% next year; it was 5.1% in May.

Soaring energy prices will contribute to economic contraction, predict Royal Bank economists.

Canada is heading for a recession in 2023, but it will be probably short-lived and won't cause as much damage as past recessions, says a new Royal Bank report.

Bank economists say soaring food and energy prices, rising interest rates and persistent labor shortages will push the economy towards a moderate contraction next year.

We see growth slowing through the end of this year but remaining positive, then we expect two quarters of declining revenue GDP in the second and third quarters of 2023, Royal Bank economist Nathan Janzen said in an interview. This has become the most likely basic assumption.

Canada will also see the unemployment rate rise slowly, then slightly faster next year, he added.

Royal Bank says expect expect the unemployment rate to hit 6.6% next year, but believes some of that weakness could be reversed from 2024.

The unemployment rate fell to 5.1% in May, its lowest level on record.

Labor markets will continue to remain fairly firm in the near term, which is why we don't expect a slowdown until next year, Janzen observed. The pace of job growth will begin to slow, however, but this is more due to a limited labor supply than demand.< /p>

The number of vacancies in Canada exceeded one million in April, according to Statistics Canada.

Meanwhile, the pace of wage growth will pick up for the rest of this year, Janzen continued, as companies look to fill vacancies and retain talent, and that consumers continue to face high prices.

Household spending, which accelerated as the COVID-19 pandemic lockdowns ended, will slow as rising prices, interest rates and unemployment hit households, the report adds.

The Royal also expects home prices to fall 10% over the coming year, which will subtract more than $800 billion to household net worth.

The average property price in May 2022 was $711,000. This is down more than 13% from the all-time high of $816,720 reached in February 2022.

The bank says a three-point increase quarters of a percentage point in interest rates is likely next week, as the US Federal Reserve did last month.

Janzen sees the Bank of Canada making a similar hike in September, ultimately raising its key rate to 3.25% by the end of this year.

He there aren't many barriers to them being quite buoyant in the short term, he asserted. It is cheaper to act quickly in the short term.

The central bank raised its policy rate by half a percentage point to 1.50% in June, in a bid to rein in soaring inflation.

But Canadian consumers and businesses do not expect inflation to dissipate significantly anytime soon, according to two polls released Monday by the central bank.

Among consumers, short-term expectations for annual inflation are for it to accelerate to 6.8% from 5.1% in the previous quarter's survey, and longer-term expectations are for a annual inflation of 4.0%, rather than 3.2% for the previous quarter's survey results.

Companies expect annual inflation in Canada is still above 5.0% in one year, and still above 4.0% in two years.

The Bank's next announcement of Canada on the rates of i interest is scheduled for July 13, and Statistics Canada will release its employment data for the month of June on Friday.

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