Canada’s economy is headed for an imminent recession in 2024—that is, if we aren’t already in one, economists say.

That, they say, should assist the Bank of Canada in its efforts to bring inflation back down to its desired 2% target.

While the economy has narrowly avoided the technical definition of a recession—which is generally accepted to be two consecutive quarters of negative GDP growth—there’s no question that growth has essentially stalled.

In the third quarter, real gross domestic product (GDP) turned negative following an upward revision to Q2 figures from a negative reading to a reading of +0.3%.

However, not all regions in the country are performing the same. Quebec, for example, posted its second straight quarterly GDP decline in Q3.

“Even if we ultimately determine that Canada as a whole was not in recession in 2023, we think it will be soon,” economists from Desjardins wrote in a recent research report, saying they expect the country’s economy to enter a recession within the first half of this year.

“While short and shallow, the economic downturn is likely to be broad-based, weighed down by consumption, investment and trade,” Jimmy Jean and Randall Bartlett wrote.

“Still-high interest rates will play a central role, squeezing households’ budgets and forcing them to reduce spending to meet mortgage payments,” they continued. “The unemployment rate is expected to move higher as well, continuing to rise even as
growth rebounds on rate cuts in the second half of the year.”

While the Desjardins economists acknowledge that calls for recession have been made as early as mid-2022, and keep being pushed back, they point to unanticipated factors that have helped shield the economy in the face of record-high interest rates.

The first, they say, is the record population growth the country has seen over the past year, which they expect will start to wane later this year. The second is unexpected strength of consumer durables, due largely to pent-up demand for vehicles coming out of the pandemic and consumer purchases by newcomers to Canada.

Finally, they point to the long lags between rate movements and the subsequent impact on the economy. “Having not yet felt the full impact of the rate hikes in 2022 and 2023, the Canadian economy will increasingly be weighed down by them,” they noted.

Is Canada’s economy already in recession?

Others, like Oxford Economics, believe Canada is already in the midst of a recession, and are forecasting a more substantial economic downturn as the year progresses.

“We believe Canada slipped into a recession in Q3 that will deepen and endure well into 2024 as the full impact of past interest rate hikes materializes,” economists Tony Stillo and Cassidy Rheaume wrote in a recent research note.

“We expect a cutback in consumption and further weakness in housing will be key drivers behind Canada’s economic downturn,” they add. “Surging debt service costs from mounting mortgage renewals will push households to deleverage, while real disposable incomes will come under pressure from still-elevated prices, slower wage growth, and job losses.

As a result, Oxford Economics’ baseline forecast is for real GDP to post negative growth of -0.3% in Q4 and -0.4% in Q1.

This, they say, will “create slack, ease price pressures and help bring headline CPI inflation back to the 2% target by late 2024,” which is about a year earlier than the Bank of Canada’s latest forecast released in October. On Wednesday, the Bank will unveil its latest forecast as part of its Monetary Policy Report.

Additionally, under this baseline forecast, Oxford says housing activity will likely continue to weaken in the months ahead as “job losses and growing income insecurity combine with record unaffordability to reduce demand,” which would lead to an increase in distressed home sales.

“Our baseline forecast anticipates house prices will decline further through mid-2024 and result in an overall 22% peak-to-trough decline from the February 2022 peak,” they add.