Canada to bypass recession, recover in late 2024

Despite challenges, Deloitte forecasts Canada's economic recovery and interest rate cuts starting mid-2024

Canada to bypass recession, recover in late 2024

Deloitte Canada's economic outlook report suggests Canada is on course to avoid a recession and anticipates a recovery starting in the latter half of 2024, despite the challenges posed by higher interest rates.

The firm acknowledges several persistent issues, such as inflation, rising business insolvencies, and an increase in mortgage delinquencies, urging a cautious stance on the near-term economic outlook as reported by BNN Bloomberg.

However, the trajectory suggests a likely avoidance of recession, with a recovery anticipated in the second half of the year.

To combat inflation, the Bank of Canada escalated the key interest rate from near zero in March 2022 to the current five percent.

With inflation now cooling, Deloitte predicts interest rate cuts could commence as early as June, aligning with the expectations of many economists for rate reductions in mid-2024.

Despite these optimistic signs, Deloitte forecasts Canada's economy to remain relatively stagnant in 2024, particularly in its first half, with real GDP growth estimated at one percent for the year, improving to 2.9 percent in 2025.

This forecast is based on several assumptions, including strong GDP growth in the US, easing inflationary pressures, anticipated rate cuts by the Bank of Canada, and continued population growth through immigration, which supports demand.

Recent data from Statistics Canada supports a cautious optimism, with GDP growth of 0.6 percent in January and a preliminary estimate of 0.4 percent growth in February. The anticipated economic recovery hinges on the expected interest rate cuts, contingent upon further moderation of inflation.

However, certain inflation-driving factors, such as high housing costs and wage pressures, are not expected to abate soon.

Deloitte points out the sustained cost pressures from renewing mortgages at higher rates and increasing rental costs, alongside wage pressures that exceed inflation rates without matching productivity gains, contributing to rising unit labour costs for businesses.

The labour market has shown resilience, though employment gains are expected to decelerate in 2024. Household spending is likely to stay subdued in the early part of the year due to the higher cost of living.

Nevertheless, the report suggests that conditions will improve next year as interest rates decrease, the economy strengthens, and pent-up demand is released.

Deloitte also highlights concerns over falling business investment, exacerbated by elevated interest rates that dampen recovery prospects in this sector. Businesses are reportedly postponing expansion plans in favor of maintenance due to weaker demand and tighter credit conditions.

In contrast, the US economy has shown greater resilience under similar pressures, with expectations for continued but moderated growth in the upcoming years.

Deloitte forecasts US real GDP growth at 2.4 percent in 2024 and 1.4 percent in 2025, indicating a more robust economic performance compared to Canada but expecting a moderate pace moving forward.