It looks like the Bank of Canada will get what it wanted, a soft economic landing, in which growth has slowed considerably but avoided a recession. In less than two years, the Bank of Canada raised interest rates 10 times, from near zero to 5%.
In June 2022, Canadian inflation hit its highest level in 40 years at 8.1%. Since then, inflation has come down and currently sits at 2.8%. That puts it close to the Bank of Canada’s target range of 2%.
Has the Canadian Economy Avoided a Recession?
When the Bank of Canada began its aggressive interest rate hike policy in March 2022 to cool inflation, many believed it would tip the Canadian economy into a recession. A recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth. And while the Canadian economy has skirted a recession, it’s in definition only.
For two years the Canadian economy has been straddling a recession. The Canadian economy contracted in January, April, October, and December 2022. In 2023, the Canadian economy shrank in April, July, September, and December.
In those months when the Canadian economy did grow, it was marginal at best. For example, in October 2023, GDP growth was zero and just +0.2% in November. While the interest rate hikes have not led to a recession, it certainly feels like it for most Canadians.
In fact, approximately 39% of Canadians believe we’re in a recession. A survey from the Bank of Canada believes inflation has slowed but is far higher than it actually is. Canadians perceive inflation to be at 5.3%, instead of 2.8%, with 60% saying stubbornly high grocery prices are a major part of that perception.
When Will the Canadian Economy Rebound?
There is reason to be optimistic, though. Again, inflation has cooled significantly and most economists believe the Bank of Canada will make its first interest rate cut in this cycle in either June or July.
Should interest rates begin coming down in the middle of the year, it is expected that the Canadian economy will begin to recover in the back half of 2024. Real GDP is projected to come in at 1% in 2023 before hitting 2.9% in 2025. All of this is contingent on when the Bank of Canada starts cutting interest rates, which is itself, based on when the inflation rates get closer to 2%.
Even when interest rates do begin falling, household spending is expected to remain muted as Canadians continue to deal with the highest cost of living. By all accounts, Canadian GDP should ramp up in the second half of 2024 as the economy rebounds.
Until then, higher interest rates will continue to weaken the Canadian economy and hamper consumer and business confidence.
Learn-To-Trade.com, Canada’s Leader in Stock Market Trading Courses
The Canadian economy has avoided a recession, and with interest rates poised to begin falling over the coming months, the Canadian economy could begin to recover in the back half of 2024 with solid growth coming in 2025. To find out how that will impact Canadian equities and the dollar, ask the trading experts at Learn-To-Trade.com.
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