Is Canada Headed Towards a Recession in 2023?

Canadian economy remains resilient despite prolonged and stagnant economic growth in the last couple of years.

Most economic analysts predict a mild economic recession for the Canadian economy in 2023 due to high inflation, disrupted global supplies, higher interest rates, a slowing housing market, and a widening skilled labor shortage gap, to name a few factors.

Is Canada Headed Towards a Recession?

The Bank of Canada forecasted a slowing Canadian economy in 2023. It predicted the real GDP to remain below 2.0% for 2023.

The OECD predicted the GDP to remain around 1.3% and Deloitte and other analysts predicted a similar downturn in the Canadian economy.

These forecasts predict a recovery stage from the second half of 2023 through 2024 where the GDP rate is predicted to reach 2.0%.

The inflation rate has long passed its current peak rate but is still considerably higher at 5.2% at the end of February which is still far from the Central Bank’s target of 2.0%.

The Bank of Canada’s interest rate remains steady at 4.50% after the recent hike came in January 2023.

Combining these factors we can see a stagnant economic outlook for Canada in 2023. Although technically, it can’t be called a “recession” as the GDP rate does not enter into a declining phase through consecutive quarters.

The Canadian economy is to witness a moderate recession where interest rates remain high, the unemployment rate increases, GDP remains stagnant, and the consumer spending index slows down economic activities in 2023.

Factors Contributing to Recession in Canada

Like the global economy, the Canadian economy is still recovering from the effects of Covid-19 restrictions.

Global supply chain disruptions due to Covid-19, the recent Russia-Ukraine war, declining oil prices, and several other global factors remain major contributors to a slowing global and Canadian economy.

The global recession meant lower consumer spending in Canada which in turn stalled domestic economic production. As a result, prices soared, and combined with other factors, the inflation rate went up.

As a result, the Bank of Canada increased its interest rate to curb inflation. In turn, consumer borrowing, mortgage prices, and consumer spending were all affected.

Combine it with the US economic recession, higher inflation rates, and a slowing GDP. Canadian trade with the US and other global players has also been affected in the last couple of years.

The housing sector in Canada began 2023 with a 40% lower sales year-on-year, although it recovered slightly in February. However, the forecasts for the housing sector remain pessimistic for the year 2023 due to high inflation and higher interest rates.

The Impact of Recession on the Canadian Economy

Canada's unemployment rate remains around 5% currently. The economy is recovering and producing more jobs than in the last couple of years.

However, due to higher inflation and interest rates, the economy is still predicted to remain stagnant. Some reports suggest the unemployment rate to jump to as high as 8% by the end of 2023.

As more consumers turn to debt-driven spending, they start to consume less. In effect, it further slows down the gross domestic product (GDP).

Although the Bank of Canada has halted its interest rate hikes, it hinted at increasing the rates further if the inflation rate does not fall for a longer period.

The housing sector, which is a major contributor to the Canadian economy has shown a sluggish recovery too. The house sales remained down 40%, with new listings -26.3% and average house prices declined by 18.9% (YoY).

The economic indicators point towards a stagnant Canadian economy more than a prolonged recession. A conservative estimate suggests the Canadian GDP may grow by half a percent by the end of 2023 at best.

Challenges for Businesses in 2023

Higher inflation rates, an increasing shortage of labor, disrupted global supply chains, and a slowing local economy are all major challenges for businesses in Canada.

Although the Canadian economy has shown resilience, it still poses challenges to entrepreneurs in Canada to cope with hardships through 2023 and beyond.

Rising business costs are another major concern due to higher inflation and expensive global supply chains. It further pushes businesses back to slower sales and lower profitability.

The best scenario for businesses is to remain focused on revenue diversification, maximizing available resources, increasing efficiency, and exploring newer markets whenever an opportunity arises.

Seeking professional help in this challenging economic outlook can also help you devise an effective plan and prevail through the upcoming economic recession.