After a strong year for the economy, 2023 will be shaped by high interest rates

OTTAWA –

The Canadian economic system began off the yr with a exceptional restoration from the COVID-19 pandemic, however heading in 2023, excessive rates of interest are anticipated to take a major toll.

“2022 was quite a rollercoaster,” stated Randall Bartlett, senior director of Canadian economics at Desjardins.

After taking a deep plunge in the course of the pandemic, the economic system bounced again this yr with sturdy development and record-low unemployment. The housing market additionally boomed due to low rates of interest spurring buying exercise.

This exuberance within the economic system, nevertheless, together with world pressures, led to arguably probably the most urgent financial difficulty of the yr: decades-high inflation.

In flip, the Bank of Canada responded to quickly rising costs with one of many quickest financial coverage tightening cycles in its historical past, setting the stage for a rockier yr forward.

“We’re really expecting to see the rubber meet the road in terms of the implications of interest rate hikes in the first half of next year,” Bartlett stated.

Since March, the central financial institution has raised its key rate of interest seven consecutive instances, bringing it from 0.25 per cent to 4.25 per cent. That’s the best it has been since January 2008.

Canadians and companies going through greater borrowing prices are anticipated to tug again on spending extra noticeably within the new yr. Economists count on that course of to gradual inflation, although how shortly, is unknown.

“The thing that we’re looking at is how quickly does inflation come down?” stated James Orlando, TD’s director of economics.

Inflation peaked at 8.1 per cent in June and has been steadily declining since. Last month, the annual inflation charge fell to six.8 per cent, displaying slight however constructive progress.

Orlando stated TD expects inflation to fall considerably within the new yr as development globally and domestically gradual.

In its October financial coverage report, the Bank of Canada forecasted the Canadian economic system will stall towards the tip of yr and into the primary half of 2023. That’s in step with projections by many forecasters, although some are accounting for a recession within the new yr.

There have been some early indicators that the upcoming financial slowdown is already underway, with shopper spending declining within the third quarter.

As the economic system takes a flip, labour teams particularly have been involved concerning the impact of rate of interest hikes on employment.

However, many economists are optimistic that unemployment will not rise too dramatically given the present tightness within the labour market.

In November, the unemployment charge was sitting close to file lows at 5.1 per cent.

“We are starting the year with very high interest rates, still stubbornly high inflation, but a solid foundation with respect to employment 1/8and 3/8 savings for Canadians,” stated Orlando.

Although Desjardins is without doubt one of the forecasters predicting a recession subsequent yr, Bartlett stated it isn’t all doom and gloom.

“Households are coming into this in a much better position than previous recessions,” he stated, including that the economic system ought to get well towards the tip of subsequent yr.

One issue that may affect the depth of the financial downturn is whether or not the Bank of Canada will proceed to lift rates of interest.

After its final rate of interest choice in early December, the central financial institution signalled a willingness to press pause on its aggressive charge hike cycle.

“Looking ahead, governing council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the central financial institution stated.

However, forecasters are break up on whether or not the Bank of Canada is definitely able to cease elevating charges.

TD is betting on yet another rate of interest hike in January, whereas Desjardins is within the camp of no extra hikes.

As excessive rates of interest start to weigh extra noticeably on the economic system, dialogue is certain to show to cuts.

Both TD and Desjardins count on the Bank of Canada to start slicing rates of interest towards the tip of the following yr, supporting a bounce again for the economic system.

“We don’t think that the central banks will be able to keep interest rates at these very high levels for too long,” Orlando stated.

This report by The Canadian Press was first printed Dec. 23, 2022.