Canadian headwinds continue to mount
|Summary
- After maintaining a respectable pace of growth through much of 2022, Canada's economy—especially the domestic economy—appears to have lost some momentum in recent months.
- Heading into 2023, the outlook for the Canadian consumer in particular suggests a further downshift in growth may be forthcoming. Amid rapid inflation, real household disposable incomes are falling, which should restrain consumer spending. Rising interest rates should also weigh on the housing sector and broader consumer activity. The outlook for business activity and investment has also become more uncertain. Altogether, we forecast a mild recession in Canada in the first half of 2023.
- With inflation still elevated, we still expect the Bank of Canada of raise its policy rate by 25 basis points to 4.50% at its late January meeting. However, as long as core inflation begins to slow perceptibly in the months ahead, we anticipate that this rate hike will be the last of the current tightening cycle.
- From a currency perspective, we also believe a contracting Canadian economy and end of Bank of Canada tightening could contribute to some underperformance by the Canadian dollar over the short-to-medium term.
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