Thoughts from RBC Economics

July 11, 2022 | Matt Barasch


RBC Economics is forecasting a likely mild recession in 2023 for the Canadian Economy, pointing out "when you're at the top of the hill the only way to go is down".

RBC Economics: Forecasting a Mild Canadian Recession in 2023

RBC Economics is out with a piece Canada's Economy is Headed for a Recession that forecasts a likely mild recession in 2023 for the Canadian economy. As the piece points out: “when you’re at the top of the hill the only way to go is down.”

In RBC Economics’ view, the Canadian economy, which has been “firing on all cylinders” in the wake of Covid shutdowns is facing a combination of headwinds that are likely to push the economy into recession by next year. These headwinds include:

  • A tight labor market, which is putting upward pressure on wages;
  • Soaring food and energy costs;
  • And rising interest rates, which are likely to weigh on the housing market, while also squeezing household budgets.

On the first point, labor markets in Canada are about as tight as they have ever been giving rise to an unprecedented number of job openings:

RBC Economics expects the push of higher interest rates, combined with inflationary pressures, to weigh on the labor market as we head into 2023. Normally, during recessions, the unemployment rate will rise 2% or more, but RBC Economics sees a ~1.5% rise from the current historically low level of 5.1% by next year to a level of ~6.6%. Both the 1.5% rise and the 6.6% UR level would be well below prior recession peaks:

Assuming the Bank of Canada looks at the same data, why is it willing to go this route? RBC Economics believes that the BoC will emphasize inflation relief over the economy in the near-term as “inflation has been too strong for too long and is starting to creep into longer-run business and consumer expectations. Higher inflation expectations can become self-fulfilling, making businesses more likely to pass on cost increases and consumers more willing to pay for them (and demand higher wages).”

Further, RBC Economics believes the recession, should it occur, is likely to be mild, and that the BoC will not have any trouble reversing policy through interest rate cuts in 2023/24 to stimulate the economy. In other words, a bit of economic pain will be worth it to reduce future inflation expectations.

So what does this mean for stocks and bonds in Canada? Recessions are never positive, but as we noted on our mid-year update, there are four potential outcomes for the economy and inflation in the near-term:

While the upper left – normalizing inflation/positive growth – would be the panacea for markets, the likelihood of this outcome has dimmed with the aggressive tightening by the Federal Reserve and Bank of Canada. Given that markets are already down 10-20% in 2022, the upper right, which would tend to fit RBC Economics’ expectations for Canada, may not be such a bad outcome and could be mostly priced in at this point.

Today’s job data sends conflicting message: Post the release of the RBC Economics report, Canada released its job numbers for June. Jobs fell by 43,000, marking only the second time over the past year that Canada has experienced a negative job creation month. However, while Canada suffered job losses, the unemployment rate actually fell for the month to a record low of 4.9% as the participation rate (those who are actively employed or seeking work) fell sharply for the month. Thus, the job market may be beginning to buckle, but the lack of available workers remains an issue.


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