As Canadians continue to struggle with high inflation and a seemingly ballooning cost of living, industry experts are bracing for a recession to hit this year.
A new survey from Chartered Professional Accountants Canada found that more than two-thirds of executive level CPAs (67%) believe a mild recession is likely to hit the Canadian economy in 2023. Although last year many industry leaders were calling for a recession to hit in the early months of 2023, the economy continued to grow as it saw record-low unemployment, pushing recession expectations to later in the year.
"The main thing is that the interest rates are taking longer to make their way to the economy," David-Alexandre Brassard, CPA Canada’s Chief Economist, tells STOREYS. "If you put that together with the fact that our labor market is constrained, since we have an aging population, it essentially means that, so far, employment has kept increasing. In the fall, we saw decreases in job vacancies [...] but it hasn't transferred into layoffs at the scale of the economy."
Brassard says there's no unanimously agreed upon timeline for when the recession is expected to hit, but an economic retraction seems likely to begin in either the second or third quarter of the year.
"All of this, of course, depends on how much inflation sticks around and how long we have to keep the interest rates high," Brassard said.
A mild recession, as opposed to a significant one like was seen in 2020, will typically still allow the economy to end the year with an overall annual growth, Brassard says, with unemployment levels rising, but not catastrophically.
"In a mild recession, you might have a harder time finding a job," Brassard said. "It might not necessarily turn into a layoff phase for your company, but you might stop hiring significantly. Also, it's a bit of a double whammy in the current context because there's a high cost of living."
Higher interest rates are already weighing on Canadian households, largely thanks to significantly increased mortgage payments, but Brassard notes that with mortgages typically being on a five-year term, we've only seen a portion of owners renew at a higher rate so far. It's somewhat of a perfect storm for owners and renters alike, with the higher interest rates affecting both mortgage payments and rent prices, and limited supply of both fuelling competition and driving up prices further.
"In both cases, what it does is essentially reduce the amount of money you can spend outside of housing, and that's what leads to a slowdown of the economy," Brassard said. "For example, this summer, I don't suspect tourism will be quite as active as it was in prior years."
Real estate is the largest single-sector contributor to Canada's GDP, including sales and leasing across all segments of the market. Brassard notes that although strapping Canadians with such high mortgage costs may feel risky, so far, delinquency rates have remained at near-historic lows, meaning payments are being made and mortgages remain profitable for lenders. What has shown some risk, however, is commercial real estate, particularly offices.
"Because vacancy rates, [risk factors are] a bit higher there than they were pre pandemic," Brassard said. "When owners -- it's mostly investors, let's be honest -- when they renew their mortgage for commercial real estate on the office front, they have less revenue, so that's a bit of a risk factor -- less in Canada, more in the US, mainly because Canadian banks are more heavily weighted on residential real estate than on commercial real estate when compared to the US."
Another area to watch is real estate development. Construction and renovation, although having boomed during the pandemic, is showing signs of slowing down into summer, Brassard says.
"Not as many housing starts, that's what people are forecasting," Brassard said. "I guess we'll have to wait and see how this slowdown trend in construction translates to the lumber industry, and if it's going to impact prices. Of course, on this front, we don't only have to look at Canada, we have to look at the US, who's much bigger than us when it comes to construction."
The CPA Canada survey found that just 18% of respondents were optimistic about the Canadian economy. Although this is a small increase from the 9% and 10% that reported optimism in the third and fourth quarters of 2022, respectively, it's a far cry from the 40% seen in the first quarter of 2022, before interest rate increases began.
Looking forward into 2023, Brassard says he doesn't expect this optimism to continue to grow, rather it will likely stabilize or deteriorate slightly. High inflation, although slowing, is likely to hang around for quite some time, in part thanks to higher wages.
"Inflation can self sustain," Brassard said. "What I mean by that is, of course, workers want to be paid more to cover higher cost of living, but once that gets ingrained into the economy, well, if workers expect their wage to increase significantly, and businesses have to pay that higher wage, they'll have to keep raising prices and then we can have an inflation spiral."
The known solution, Brassard says, is "really not fun."
"It's slowing down the economy, and when you raise interest rates, it slows down the economy," Brassard said. "Labor is less constrained, so workers have less of a bargaining power in terms of their wage increase, and that's sort of how you keep it from spiraling. But as I said, it's not a fun solution for workers."
