IMF predicts possible recession for Canada

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A report from the International Monetary Fund predicts a « substantial » cooling in Canada over the next year in which « shocks could easily push the economy into a mild recession. »

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In a report released Wednesday, IMF staff said growth in Canada is expected to slow to 1.5% in 2023, from 3.3% in 2022. The unemployment rate could exceed 6%.

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But the report also warned that the economic outlook could be « significantly worse ». If inflation remains elevated, the Bank of Canada may need to raise rates further, resulting in a more pronounced slowdown. Tariffs from the rest of the world, particularly the United States, will also have a big impact on Canada, he said.

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« A mild recession could easily emerge, and the historical distribution of risks suggests a roughly 10% chance that the economy will contract for all of 2023, » the annual statement from the Canadian IMF mission said.

On Wednesday, economists at Canada’s biggest bank warned that the country would likely fall into recession sooner than they had expected.

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The Royal Bank of Canada originally forecast the contraction to occur in the second quarter, but now expects a recession in early 2023 as higher interest rates and inflation sap growth.

« Cracks are forming in the Canadian economy, » wrote RBC economists Claire Fan and Nathan Janzen.

IMF staff expects the Bank of Canada to lower its rate to at least 4% by the end of this year and stay there for several quarters, which will cause inflation to return to the target of 2% by the end of 2024. Higher borrowing rates will drive home prices down 20%, but rising immigration should cushion the decline, they said.

He also urged Canadian governments to support this fight against inflation, saving windfall revenues from the commodity boom and avoiding broad-based spending increases that would undermine central bank efforts.