“Against this backdrop, we remain cautious about the near-term outlook,” the firm said in its report. “But based on its current trajectory, Canada appears likely to skirt a recession and even seems poised to begin recovering from its current slump in the second half of this year.”
Are inflation and recessions related?
In an effort to fight breakneck inflation, the Bank of Canada (BoC) raised the country’s key interest rate from near zero in March 2022 to the current 5% with a series of hikes. Inflation has cooled significantly since then, and Deloitte says the central bank is poised to start cutting interest rates in June. Most economists are expecting cuts to begin in either June or July.
Despite these positive signs, Canada’s economy is likely to remain “stuck in neutral” in 2024, Deloitte said, particularly in the first half of the year, with real gross domestic product (GDP) growth coming in at around one per cent this year before reaching 2.9% in 2025.
GDP’s effect on a recession
Some of the assumptions underpinning Deloitte’s forecasts include robust GDP growth in the U.S., a continued softening of inflationary pressures, cuts from the BofC and a steady flow of newcomers to the country, supporting demand.
Statistics Canada reported on Thursday, March 28, 2024, that Canada’s GDP rose 0.6% in January, with a preliminary estimate of 0.4% growth in February. The economic recovery is contingent on interest rate cuts, the report said, which themselves depend on inflation continuing to moderate.
“The good news is that measures to cool inflation have made significant progress,” the report stated. “That being said, the factors that are keeping inflation elevated are not likely to reverse in the near term.”
Will home prices and unemployment drop in 2024?
The biggest headwind is the cost of housing, Deloitte said, as Canadians continue to renew mortgages at higher rates. Higher shelter costs are also being felt by renters.
“Further, wage pressures continue to run well above inflation without any commensurate increase in productivity, and that is driving up unit labour costs for businesses and making it difficult to contain inflation,” the report said. The labour market continues to hold up remarkably well, Deloitte said, though it predicts employment gains will slow sharply in 2024.
