For months, economic experts have warned of a pending recession that's likely to hit Canada by early next year. Although the very mention of a recession will spark fears for many, a new report from Deloitte argues that the recession will be relatively short and mild, dubbing it "a recession with an asterisk."
Tight labour markets and higher pandemic savings are expected to cushion the blow of a recession, which Deloitte predicts will begin by the end of the year.
High unemployment rates are typical during a recession, but with Canada in the midst of widespread labour shortages, the report predicts that unemployment will not rise as much as it normally would. In fact, Deloitte is forecasting an unemployment rate of no higher than 6%, peaking in the third quarter of 2023. This is just slightly above the 5.4% unemployment rate seen in August of this year.
"That’s due to a few key factors," the report reads. "First, job vacancies remain a concern in various sectors, and the difficulty in finding labour is expected to keep employers from being quick to reduce their payrolls, even in the face of slowing growth. Second, labour supply is expected to remain tight as the retiring cohort of baby boomers continues to put downward pressure on the labour market. Third, the recession we’re anticipating isn’t expected to be broad-based. Thus, while we’ll see declining employment in some sectors, growth in others will help cushion the blow to total employment."
Sectors like retail trade, education services, building support and administrative services, communications, and cultural services are all expected to weaken, while ongoing recovery in transportation and accommodation services will help to offset near-term weakness.
Despite high inflation eating away at household purchasing power, the report notes that increased savings seen during the pandemic will help Canadians weather the recession. With that said, consumption spending is expected to weaken in the coming months, especially when it comes to the purchase of goods. Spending on services, which has boomed in recent months due to pent up demand for travel and social outings, is expected to continue growing but at a slower rate until the end of the year.
There are already signs that an economic slowdown is coming, the report says, one of which is the declining real estate market. Home prices have fallen substantially since their February peak, and Deloitte is predicting even further declines with a 21.5% decline expected for 2022 and another 14.4% dip projected next year.
Falling home prices came as the Bank of Canada began its series of aggressive rate hikes in an attempt to get inflation under control. The five rate hikes seen since March have brought the bank's overnight lending rate up to 3.25%. Although inflation has dipped in recent months, another hike is still expected next month.
"Accordingly, we expect another 50 basis points hike at the next meeting in October, lifting the overnight rate to 3.75%," the report reads.
Deloitte is predicting a pause in hikes after October, but expects the lending rate to remain untouched until 2024.