By Ketki Saxena
Investing.com -- Scotiabank (TSX:BNS) economists reiterated calls for a recession in Canada, with growth expected to slow to 0.6% next year, compared to 3.2% in 2022.
Jean-François Perrault, chief economist and senior vice-president at Scotiabank Economics writes that “Canadian growth will stall in the first half of next year as the country experiences a technical recession”.
The recession in Canada is expected to be triggered by “Lower commodity prices, elevated uncertainty, lower equity values, and a weaker US [which] are all acting as brakes on growth”.
Growth in the US is expected to slow as the Federal Reserve continues its rate hike cycle. Perrault expects rates to rise to 5%, 150 bps higher than Scotia’s previous forecast. “This additional tightening and a substantial decline in equity markets (impacting household wealth) are enough to trigger a recession.”
In Canada, Perrault writes, “These headwinds are compounded by our belief that the Bank of Canada will now need to raise its policy rate to 4.25% by the end of the year”.
Scotia had previously called for the rate to peak at 3.75%, and says that its revised forecast “reflects in equal measure the fiscal support measures being rolled out domestically, as well as the impact of a rapidly depreciating Canadian dollar.”
The fiscal support rolled out at the federal and provincial levels, which Perrault notes “has the unfortunate impact of blunting central bank efforts to fight inflation and may ultimately require higher interest rates to lower inflation”, will require an additional 25 basis points of tightening.
On a positive note, Perrault writes that “The decline in economic activity is likely to be minor and short-lived owing to the underlying resilience of the economy. Firm and household balance sheets remain strong, and the labour market is still dramatically short of workers.”
The Bank of Canada’s benchmark interest rate is currently at 3.25%. Two more policy rate announcements are scheduled before year end. The next rate announcement is expected next week on Oct. 26.