Canada Might Enter Mild Recession

On Thursday, the Canadian government released its 2022 Fall Economic Statement, warning that the country is likely to enter a mild recession in the first quarter of 2023.

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The Department of Finance has developed a "downside scenario" that considers the impact of more persistent inflationary pressures and further tightening in monetary policy, leading to a "hard landing" in the economy.

In the downside scenario, CPI inflation stays above 3 percent until the first quarter of 2024, about six months longer than in the September 2022 survey, before reaching 2 percent by the end of 2024.

In response, short-term interest rates reach 4.5 percent in the first half of 2023 and are up by 0.7 percentage points over the entire forecast horizon. As a result, Canada enters a mild recession in the first quarter of 2023. For 2023 as a whole, real GDP declines by 0.9 percent.

"This is a challenging time for millions of Canadians. It's important that I'm honest with Canadians about the challenges that lie ahead. Interest rates are rising as the central bank steps in to tackle inflation. That means our economy is slowing down," Deputy Prime Minister and Finance Minister Chrystia Freeland said in the parliament.

The Finance Department surveyed a group of private sector economists in early September. The average of private sector forecasts has been used as the basis for economic and fiscal planning since 1994. Private sector economists projected real GDP growth at just above zero for the next several quarters.

Since the private sector survey was conducted in early September, global economic and financial conditions have continued to deteriorate, and the balance of risks to the growth outlook are tilted to the downside, with growth more likely to come in below the survey.