A Canadian recession will come a lot sooner than initially expected, cautioned the country's oldest and most established bank. In a note investors released yesterday, RBC changed its forecast for a moderate recession. They did this in response to rising inflation and interest rates. They also foresee hundreds of thousands of jobs that can be lost in just a few short months.
RBC is calling for the recession to commence in next year's Q1, one quarter earlier than what they had previously forecasted They are attributing this to central bank's aggressive monetary policy.
The Bank of Canada is currently forecasting the key interest rate will reach levels we haven't seen since the Great Recession. The BoC interest rate is expected to hit 4% and the US Federal Reserve to reach between 4.5% and 4.75% by next year. Interest rates that are too low and for too long have usually resulted in inflation levels which require aggressive rate hikes.
The central bank figures the average Canadian household will lose approximately $3,000 in purchasing power within a year or so. The jobless rate is expected to reach 7% - about 2% more than where it is at today.
“The pain of the upcoming recession won’t be distributed equally among Canadian businesses and households,” said Nathan Janzen, RBC’s assistant chief economist. “The manufacturing sector will likely be among the first to pull back while some high-contact service sectors like travel and hospitality could prove more resilient than in a ‘normal’ historical recession," he added.
RBC believes things can become even worse than they are forecasting if inflation stays sticky. “Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably,” said Janzen. The bank expects the BoC to pause its rate-hike cycle late this year, and the US Fed early next year.