In a striking analysis of Canada’s economic trajectory, Oxford Economics, a leading macro research firm, has declared that Canada is not just experiencing a slowdown but has already entered a recession. This conclusion, outlined in their latest research brief, forecasts a hard landing for the Canadian economy, a scenario that could rapidly cool inflation but also bring its own set of challenges.
Canada Is Already In Recession, Hard Landing Expected
Oxford Economics’ assertion places them among the few who believe Canada is already in the throes of a recession. This perspective is drawn from the recent Q3 GDP report, which indicated a quarterly decline of 0.3% (-1.1% annualized), starkly contrasting with the Bank of Canada (BoC)’s more optimistic forecast of 0.2% growth (+0.8% annualized). Despite previous signs of negative GDP per capita growth, Oxford Economics pinpoints Q3 as the official commencement of the recession.
Bank of Canada Overestimating Economy’s Strength
Tony Still, Director of Canada Economics at Oxford Economics, suggests a grim outlook: “We believe the Canadian economy has slipped into a moderate recession that will create slack, ease price pressures and help bring headline CPI inflation back to the 2% target by late 2024.” He adds that global reductions in oil and food prices will also contribute to slowing inflation this year.
Canadian Inflation To Slow Faster Than The BoC Expects
Oxford Economics’ forecast for a return to the inflation target is notably quicker than other predictions. The firm’s expectation of a hard landing implies a rapid cooling of inflation, a trajectory that seems likely but is subject to change based on various economic factors. The impact of a soft landing, while potentially less disruptive, may not be as beneficial for consumers.
Stillo contrasts their view with the BoC’s, noting, “The BoC expects CPI inflation will return to its 2% target towards the end of 2025 – about a year later than our baseline recession forecasts.”
A Hard Landing Expected, Or Higher Inflation & Interest Rates
While many anticipate a drop in interest rates, Oxford Economics’ baseline forecast, which includes a hard landing, predicts a quicker taming of inflation and a consequent earlier reduction in interest rates than the BoC currently foresees.
“In our baseline recession forecast, further hikes in the overnight rate by the BoC are not warranted. We expect the central bank will hold firm at 5% until June, when it will begin to gradually lower the policy rate to 4.25% by the end of 2024,” Stillo elaborates.
A Hard Landing Will Return Canadian Inflation To Target Faster
The firm’s baseline recession forecast (hard-landing) contrasts sharply with the more commonly expected soft-landing scenario. The longer inflation remains high, the more entrenched it becomes, necessitating higher interest rates to combat it. Most analysts predict a soft landing with subsequent rate cuts, but in light of Stillo’s analysis, these predictions appear overly optimistic.
Stillo warns, “Our soft-landing scenario also suggests the BoC would very likely have to end its current pause and hike the policy rate by another 50 bps to 5.5% by mid-2024.”
In conclusion, Oxford Economics’ assessment paints a starkly different picture of Canada’s economic future compared to more conventional forecasts. While a hard landing may expedite the return to target inflation, it also signals a more pronounced and immediate impact on the economy, challenging the resilience of businesses and consumers alike. As Canada navigates these turbulent economic waters, the decisions of the BoC and the government’s fiscal policies will be critical in shaping the country’s economic path forward.