By Ketki Saxena
Investing.com -- It’s that time of year: where we’ll be getting year-end forward-year forecasts from Canadian economists.
Economists at TD (TSX:TD) today reiterated their earlier call - and general consensus - for a downturn in 2023, as “high inflation and rising interest rates will increasingly take their natural course of action on cooling demand into 2023.”
With the Canadian economy expected to stall in the H1 2023 - a scenario long expected by private sector economists, but only recently admitted by the Bank of Canada - TD now expects a 1.5% rise in the unemployment rate through 2023 and 2024.
TD’s analysis notes that the outlook for the peak unemployment rate at 6.5% corresponds to a 110,000 Canadian jobs lost - although TD warns that there “is a risk that Canadian employers may go further."
At the moment however, the job market continues to “reflect tightness based on vacancy rates and low unemployment rates”, indicating an economy that currently remains in excess demand.
Apart from bringing inflation back to its 2% target, cooling an overheated job market is part of the Bank of Canada’s defacto dual mandate, and an increasingly pressing concern as the BoC becomes increasingly concerned about the possibility of a wage-price spiral setting in.
The Bank of Canada has hiked rates 400 basis points so far this year, taking its overnight policy rate from 0.25% before March to their current level of 4.25%. The BoC most recently hiked rates by 50 bps last week, and indicated that it is nearing the end of its aggressively front-loaded monetary policy tightening cycle.
TD now expects the BoC’s terminal rate at 4.5%, expected in Q1 2023.
The analysis also notes that “Both short-term and long-term bond yields are likely to decline over 2023 as the weak economic backdrop causes increasing expectation for policy rate cuts.”