Recession looms due to rising interest rates, changing supply chains

Canada is expected to enter a mild and short-lived recession by the end of the year. This economic outlook examines the causes and effects of a recession in Canada for both consumers and businesses alike.

There are two main factors that are contributing to an impending recession: the Bank of Canada’s aggressive increase of interest rates and the need to rebalance inventories. With the consecutive hike of interest rates this year, it will take time for inflation to return to target as higher rates impact the economy. As such, we do not expect inflation to return to 2% before the end of 2024.

During the pandemic, we saw supply chain issues emerge across all industries. As a result, inventories have fluctuated quite significantly in the past few quarters and supply chains will need to improve as inventory levels are one of the key factors contributing to this upcoming economic contraction.

Despite the impending recession, the labor market is still tight, and unemployment is expected to remain low. The current demand for labour and low unemployment will mitigate the effects of the recession on consumers.

Canada’s real estate market continues to exhibit an unusual amount of volatility as a result of the rising interest rates and affordability. Both prices and units sold have fallen significantly with further declines in activity expected, however, given our strong population growth, a quick recovery in the housing market is a possibility.

The future is still uncertain and could deviate from expectations due to several factors. Ultimately, scenario planning to understand the implications of different economic trajectories is one of the best ways to be prepared to act nimbly to changing circumstances.

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