IMF predicts possible recession for Canada

Ottawa urged to limit spending to avoid undermining fight against inflation

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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.

  1. The Royal Bank of Canada expects rising interest rates and persistent inflation to push the economy into recession in the first quarter of 2023, one quarter ahead of previous forecasts.

    A recession in Canada will likely hit sooner than expected, says Royal Bank

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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.



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