RBC sees recession with $800bn lost in housing market decline

Economists at the big six bank believe household net worth will suffer and unemployment will rise

RBC sees recession with $800bn lost in housing market decline
Steve Randall

Predictions of recession have been around for some weeks now, but RBC has become the first of the big six banks to elaborate.

“Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023,” Nathan Janzen and Claire Fan of RBC Economics wrote in a report Thursday.  

The key word is ‘moderate’ with the economists expecting the recession to also be short-lived by historic standards.

The report acknowledges the strong rebound that the Canadian economy has enjoyed since pandemic lockdowns ended.

With inflation, interest rates, and the tight labour market converging, RBC’s experts say: “when you’re at the top of the hill the only way to go is down.”

Among the major impacts ahead are a slowdown in the housing market as budgets tighten and borrowing costs rise. The report suggests there could be a 10% decline in national house prices with $800 billion erased from household net worth.

It’s important to note that there has been a $2.4 trillion surge in real estate equity since 2019 but that will be little comfort to those that are left feeling less wealthy. They are likely to cut back on spending as a result.

Job losses

Business growth is constrained by a lack of labour while consumer spending is tightening due the cost-of-living crisis, with supply chain issues exacerbated by the Ukraine war.

But the report calls for rising unemployment – up 1.5 percentage points to 6.6% - as economic contraction bites in 2023. As painful as this will be for those affected, the overall unemployment rate will be far lower than the 8.7% peak of the financial crisis of 2008/9.

Although the BoC’s rate hikes will add pressure to businesses, leading to job losses, the RBC team highlights the alternative being continued inflation that would require even greater rate hikes to ease price increases.

External factors

Whatever is done in Canada, the RBC Economics’ report acknowledges that external factors will continue to impact the Canadian economy.

A slowdown for the US economy, higher food and borrowing costs for emerging markets, and other slowdowns on external growth will be a drag on Canadian growth but will also dampen inflation.

As inflationary pressures ease, the outlook into 2024 is for more optimistic.