It Looks Like Canada Is Headed for a Recession in 2023

Bay Street and Wall Street just capped off one of the worst trading years in decades with the S&P 500 falling roughly 20% and the TSX posting a negative return of 8.5%. The decline was not as big as in the U.S., mostly because the commodities and financials components account for a larger share than they do in the U.S.

This is a stark difference from 2021 where the S&P 500 rallied nearly 27% and the TSX was up 21%. After an abysmal 2022, the big question is how is the stock market and Canadian economy expected to perform in 2023?

Not well apparently.

Aside from the energy sector, North American stocks struggled to find any traction with inflation putting increased pressure on consumers. Both the Bank of Canada and U.S. Federal Reserve announced unprecedented rate hikes in 2022 in an effort to tame inflation.

The year saw the Bank of Canada raise its key lending rate from 0.25% in March to 4.25% in December—the highest levels since 2008. At the start of 2021, the Fed’s key lending rate stood at a range of 0% to 0.25% and closed the year at a range of 4.25% to 4.5%.

Those moves haven’t worked as well as hoped at combating inflation. At least not yet. As a result, analysts believe the two central banks will raise their rates further in 2023 and are not expected to cut their rates before 2024.

What kind of impact will that have on the Canadian economy? Rate hikes may be starting to cool inflation, but the increases have been so aggressive there are fears they will stall the Canadian and U.S. economies and tip them into a recession.

Will the Canadian Economy Slip into a Recession in 2023?

It seems all but inevitable. Historically, recessions come after periods of monetary tightening around 80% of the time. A recession is loosely described as two consecutive quarters of negative growth. So technically, we could be in a recession right now and not know it.

With interest rates still on the rise, Canada is expected to unofficially enter a recession in the first quarter of 2023 and stay there for most of the year. This will result in weak consumer spending on the heels of high inflation and rising debt payments cutting into household spending.

The U.S. economy is also expected to slip into a recession in 2023, which will weigh on Canadian imports. On top of that, ongoing geopolitical tensions, further supply chain disruptions, and higher interest rates could all weigh down on growth.

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