Posted at 5:00 a.m.
Although a marked decline in economic growth is to be expected as of next year in Canada, and particularly in Quebec, Deloitte does not expect the country to plunge back into recession.
“The battle is not yet lost,” says Mario Iacobacci, partner, economic consulting services, at Deloitte Canada. “It is possible to succeed in lowering inflation without causing a recession. »
PHOTO PROVIDED BY DELOITTE
Mario Iacobacci, Partner, Economic Advisory Services, at Deloitte Canada
The management of this financial advisory firm is well aware that, for some, this prediction that a recession will be avoided may seem optimistic and that this is a point of view that is significantly different from the consensus.
The most likely scenario, according to Deloitte, is one where growth slows, but inflation cools only slowly. A period of stagflation therefore appears more likely than a recession, according to Deloitte.
Canada’s gross domestic product (GDP) is expected to climb 3.3% this year, before slowing to a pace of just 1.7% next year and 1.5% in 2024, says a study to be released Tuesday. by Deloitte forecasters.
Several arguments in favor of resilience are put forward in the document.
Household wealth
In particular, Deloitte points out that Canadians have amassed more than $300 billion in savings during the pandemic, which helps cushion the rising cost of living and helps keep Canadians spending.
Household wealth has also surged during the pandemic, it added. “Wealth gains should remain intact, even allowing a correction in stock markets and residential real estate prices. Above all, labor markets are expected to remain saturated during the coming economic downturn. The unemployment rate will remain low as more baby boomers head into retirement. »
Deloitte also notes that there will be an abundance of jobs for working-age Canadians and strong wage growth, an important factor for consumer sentiment.
Less dark than it looks
While tighter monetary policies will drive up debt-servicing costs, Deloitte points out that it will also lower the rate of increase in the cost of living, which is good for consumers.
The situation is therefore not as gloomy as the headlines suggest, indicates the chief economist of Deloitte Canada, Craig Alexander, in the study.
The former TD Bank chief economist agrees that high inflation and rapidly rising interest rates could lead to a recession, “but that’s not a given.”
If inflation does not come down as expected or central banks raise rates beyond projections (i.e. above 3%), then a recession scenario becomes likely, he said.
Beware of autosuggestion
Deloitte asserts in its study that we must not forget that recessions can be psychological events.
Self-fulfilling predictions occur when everyone expects a recession and acts as if it is inevitable.
Deloitte, in its study
Deloitte expects pricing pressures to ease slowly, as inflation peaks near its current rate of just under 8% in the third quarter of this year before gradually easing. “On the other hand, it will not reach the 2% target set by the Bank of Canada at least before 2025.”
In response to high inflation, the Bank of Canada began raising the target for the overnight rate this year. Deloitte expects another key rate hike in July (50 basis points), followed by increases of another 25 points in September, October and December. “A final increase in early 2023 would bring the overnight rate to 3%, which should then stabilize. »
Profitable for Quebec?
With inflation higher in the US, the Federal Reserve is favoring a more aggressive tightening pace, so Deloitte expects the fed funds rate to reach 3% by the end of this year.
In the short term, Deloitte believes that Quebec will benefit from strong growth in public spending, but the high rate of inflation will harm consumers’ purchasing power.
“Combined with weaker population growth, this phenomenon will put pressure on household spending and investment. »
The tightening of the labor market is another factor influencing growth and to this end, Deloitte points out that Quebec has the second highest job vacancy rate in the country, after British Columbia. Thus, according to Deloitte, Quebec’s real GDP should increase by 2.9% this year, before settling at 1.3% next year.
The “normal” growth rate when there is no negative or positive shock is more around 1.5%, says Marco Iacobacci.