RBC Predicts Recession To Hit Sooner Than Predicted - Be Less Damaging
It is both a bit of good news mixed in with the bad as earlier this week the Royal Bank of Canada (RBC) has altered its prediction about the Canadian economy falling into a recession.
RBC’s Claire Fan and Nathan Janzen had previously predicted Canada’s economy would enter recession in the second quarter of 2023 but are now predicting the recession will hit the Canadian economy in the first quarter (January to March) of 2023. Fan and Janzen are economists at RBC.
The initial July 7, 2022 report predicted the recession would be short lived and the economy would bounce back once the Bank of Canada stopped raising interest rates in order to fight inflation.
The Bank of Canada fights inflation by raising interest rates thereby reducing demand and the money supply in the economy. A drop in demand for goods is suppose to - under the law of supply and demand - suppose to drop demand and with it prices and the inflationary pressures brought on by demand.
At the present time the inflation rate is at seven percent in Canada and the Bank of Canada’s target healthy economy is one with an inflation rate at two percent.
The Bank of Canada released a statement that despite the risk of a recession interest rates will continue to rise to fight inflation.
Domestically RBC said the reason for inflation in Canada is a much faster rebound from the COVID - 19 pandemic restrictions - and its shutdown of several sectors in the economy - than predicted.
“Cracks are forming in Canada’s economy. Housing markets have cooled sharply. Central banks are in the midst of one of the most aggressive rate-hiking cycles in history. And while labour markets remain strong, employment is down by 92,000 over the last four months,” Fan and Janzen wrote.
The pair of economists also do not see massive unemployment because of the recession but rather most employers will retain their workers due to the difficulties they have had in finding employees.
The RBC report comes on the heels of the International Monetary Fund (IMF) releasing a report predicting a slowdown in the world economy.
“Our latest forecasts project global growth to remain unchanged in 2022 at 3.2 percent and to slow to 2.7 percent in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent,” the IMF wrote in its October 2022 report “World Economic Outlook - Countering-The-Cost-Of-Living-Crisis.”
People who are poorer - as they did during the COVID - 19 pandemic - bear the brunt of the predicted recession with the RBC predicting they will lose $3,000 in buying power due to higher interest rates (borrowing costs) and inflation.
The good news from the RBC report is the recession will be short lived with the economy improving in 2024.
The RBC, who manage the City of Moose Jaw’s investments, likewise gave a similar warning to the City’s Investment Committee in a report the risk of recession was heightened over the next two years.