InterestInterestrateincreasesbite,leadingtodeeperrecessionEconomicoutlookJanuary2023Interestrateincreasesbite,leadingtodeeperrecessioneksasthereasonstosupportthenegativeturninsentimentstackupTheBankofCanadahasnthsagoatrenderHigherborrowingcostsforbusinessesthatwanttoinvestAndaggressivemonetarytighteningisntlimitedtoCanadatheEuropeanCentralBankandservearealsoembarkingonrapidtighteningcampaignsxpectedtotiptheseeconomiesintorecessionWhilearecessionozoneformonthsthedowngradedoutlookfortheUnitedStateswillhitCanadahardgivenourtradedependenceonoursouthernneighbours.thedoublewhammyofhighinflationandstrateshadanalmostimmediateimpactvatedmortgageratesshrankthepoolofsultweveseenhouseholdtatetumblesincethesecondquarterofwersRecentrryingcostsinthethirdquarteroflastyeartermsinterestpaymentsincreasedbybillionfromstcontributortoourgrossdomesticproductGDPthatectedawayfromspendingandsavingiscreatinganotableGiventheincreaseininterestpaymentsitsnotterriblyendingfellinthethirdquarterseoverthedgetsandleadingtoyetmoredeclinesinconsumerspending.irinvestmentspendinginthebutedtothisBusinessinvestmentiselastrecessionandverystronggrowthinhishelpingpadcapitalEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.22ourhasbecomeincreasinglyscarcenadacreatinganincentivetoinvestinproductivityenhancingcapitaltotstaffshortagesDespitethisbusinesssentimenthasbeenhsItsexpectedtoremainnitedStatesentersamildrecessionanddomesticconsumerpendingcontinuestodeclineInadditionbusinessinventoriesremainatanyhighlevelwhichwillcreateadisincentivetoinvestinnewtilthecurrentstockpilesdeclineSoeventhoughcompaniesaretedtospendmorethegainwillbemodestbecausetheyrealsoroachtoinvestingoverthenextyearingcyclehasfinishedAtrentleveloftheovernightrateishighenoughtoberapidlyolinggrowthbuttoohightobesustainableinthelongertermIndeedouroldincometowardinterestandaUSrecessionwillpushdownCanadianeconomicgrowthforuartersresultinginanoverallcontractionofthislyThiswillallowtheBankeginunwindingsomeofitsrestrictivemonetarypolicybeforetheendof.Ratecutsthroughout2024willprovidestimulusandallowundinstoreforcalstandardsEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.33minanteconomicthemecontinuestobeandthemonetarytighteningrequiredtoThegoodnewsisthatwearesinglyconfidentthatpeakpricegrowthisbehinduswithinflationdeceleratingsteadilysincehittinginJuneWeexpecttoseepricentingasolineandfoodpricesaswellasrreplacementcostsinstepwithslidingInflationremainsuncomfortablyfCanadalantinitsfighttoreturnpricegrowthtoitstargetof1%to3%.ankimplementedaasesthroughoutouncedsevenconsecutivehikesandthemberbroughttheovernightrateto4.25%.Thisyear-endmovewasaccompaniedbyashiftintone,signallingahikesWellknowmoreaftertheBankofCanadasJanuarymeeting.86420-2 -2.3 -2.2 -1.6QQQ32021Q42022Q1Sources:StatisticsCanadaandDeloitte.2022Q22022Q32022Q42023Q12023Q22023Q32023Q42024Q12024Q22024Q32024Q4EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.44sformonetarypolicychangestoikeswerejustbeginningtoeinthethirdquarterofleavingsubstantialjustificationtotapproachtofuturepolicymovesMarketseginningtopriceinaneasingofmonetarypolicyTheyieldcurveasmeasuredbytheyieldon0-yearbondsminustwo-yearbonds)turnedndhasbecomeprogressivelymoreinvertedBytheeyieldonyearbondsreachedbasispointsrlyshoweverwedontexpectthesteepdeclinesinhouseholdspendingandbusinessinvestmentthatwesawbackthen.icyrespondinastimulativewaytoabuddingttoseegovernmentsstepinalereliefpackagedespitetheirbetterthanexpectedfiscalecomingdownturnwasorchestratedbypolicytongdemandandsupplyThereforeiffiscalpolicyecomeoverlystimulativeitwouldtriggertheBankofCanadaintolicySometargetedreliefmeasureshavealreadybeenannouncedbuttheprimarytrendonthefiscalnunwindingofpandemiceraspendingAssuchgovernmentisexpectedtodeclinethisyearbeforereturningtowthinWithinflationslowingandtheeconomyenteringarecession,theBankisreversingitspolicystancebytheendofthisyearecasttocontinuethroughoutastheBankslowlyratebackdownuntilitreachestheupperboundsoftheneutralrate,estimatedtobe3%.BankofCanadaSelectedBondYieldsaccessedDecember2022.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.55HouseholdsandEconomicoutlook|January2023?DeloitteLLPandaffiliatedentities.6ThebasispointincreaseintheBankofCanada’spolicyratesinceMarchadashousingmarketHomesaleslastOctoberfellbruarypeakswipingoutgainsoverthepasttwoyearswithasuredbyownershiptransfercostsdownfromprepandemiclevelsAsdemanddriesuppricesarealsofalling,withtheceinOctoberdownmorethanfromitsFebruarypeak.gmarketoutlookisbleakoverthenexttwoyearsasresidentialentisexpectedtodropanotherthisyearafterfallingbyectedpauseininterestrateincreasesmortgagelevateduntiltheendofpreventingmanyromenteringthemarketandleadingtofurtherInvestmentinhomerenovationisexpectedtodropanotherfollowingthe1%declinein2022,asemarketactivityremainssubduedandfallinghomepricesleadtoaproachtospendingonhomeupgradesThegoodnewsisthatusingmarketwillslowlystarttorecoverinandaslowerremarketdemandoftheplungeinhomesalestheexpectedslowdowninnewhomeotherkeycontributortothepessimisticneartermoutlookestmentHousingstartsrampeduprapidlyinthespringandmerofbutsuchafastpaceisnotsustainablewhendemandcoolsrsfacehighercostsAsthecyclicaldownturnhitsthenewedtodeclineoverthenextthreeyearsreturningtogrowthWhilespendingonhousingwasthefirstareathathouseholdscutbackon,risingdebtservicingcostsandhighinflationarecausingthepullbackinngtoextendtoconsumerpurchasesConsumerspendingfellbyinthethirdquarterofandweexpecttoseedeclinescontinueovertheillnotbebroadbasedgoodssensitivetoterestratessuchashouseholdfurnishingsandapplianceswillgethitthehardestwhilediscretionaryspendingonservicessuchascommunication,tionandcultureservicesaswellasaccommodationandfoodservicescontinuetoenjoysomegrowthsupportedbyadrawdowninsavingsEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.77endingonhouseholdgoodsandservicesisexpectedtogainhacceleratestoapaceinforecastiswhatwillhappentolabourmarketsdwithnotablejoblossesascautiousbusinessestrimtheirpayrollstoadjusttodeceleratingdemandThistime,tuationissuchthatbusinesseswillneedtobalancetheascarcityoflabourThroughoutthesthemajorityoflabourforcegrowthinCanadawasduetopeoplethimmigrationlevelsplummetingduringthelaboursupplyThelevelsarenowrugglingtofindworkersIndeedjobiesremainelevatedespeciallyinlowerpayingjobsthathavenohybridworkoptions.htlabourmarketconditionswedontexpectemploymenttolybereluctanttoletgooftheirworkerstbeingabletofillthosevacantpositionsoncetheeconomyngjobdatawithsolidemploymentgrowthinOctoberandadeclineinssesareexpectedintheindustriesthataresufferingthemostintheionsconstructionwholesaleandretailtradetransportationandwarehousingandinformation,culture,andrecreation,amongothers.tthecurrentlabourmarketwillrtheeconomythatwillpreventthedownturnnitwouldbeifemployersweremoreaggressiveincuttingtheirpayrolls.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.88gefromourSeptemberoutlookisthateralReserveFedwillbeabletoorchestrateasoftlandingwhichmeansourlargesttradingpartnerwillslipintorecession,albeitamildone.AsinCanada,theUSrecessionwillbeapolicy-inducedone.hefederalfundsratebybasispointsatitsDecembermeetingbutinsteadofsignallingapotentialpause,astheBankofersoftheFederalOpenMarketherWhileinflationinswellabovetheFedstargetandabovethelevelCanadaisexperiencing.heUSoutlookhasimportantimplicationsforourtradesyeartronggainsinthesecondhalfofoilexportsareforecastdestlyinthecomingmonthsasenergydemandfallsalongsideaomicactivityOntheotherhandexportsofagriculturalandmainlyduetowheatandcanolaastheconditionsinandtostrongglobaldemandandhighproductpricesbecauseofthewarinUkraine.sareexpectedtocontinuetoexpandthettowardnewcapitalandmachinerythankstorecordingthepandemicrecoverydrivenbystrongdemandandrapidlyrisingcommoditypricesInthesecondquarterof2,onanationalaccountsbasisweremorethandoubletheirprepandemiclevelDespitetheirdeclinetoamorenormallevelactsthataccumulatedsurpluswillallowcompaniestocontinuetoinvest.mayseemcounterintuitivetodosoduringaperiodofeconomicwillallowthemtocontinuetogrowdespitethechallenginglabourmarketconditionsNeverthelesswehavedowngradedourgtoaccountfortheeconomicdownturnandthefactthathighinventorylevelsmayslowbusinessspending.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.99OutlookbyprovinceEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.10ntryfewprovinceswillbeanitobaandSaskatchewanwillenjoypositivegrowthduetothereboundintheiragriculturalindustriesafterughtconditionsdramaticallysuppressedoutputinTheseprovinceswillneverthelessbesubjecttothesamedownturnindomesticdemandocoasttocoastasCanadiansgrapplewithhighernterestratepaymentsandtheimpactsofaUSrecessionsuretotheEuropeanherestofCanadawillfeelthepinchoffallingdemandfromeperrecessionisexpectedcomparedtootherareascewillwnturnintheNorthAmericanhousingmarketWithhigherdebtpaymentsandinflationpinchinghouseholdbudgets,therewillbelessdiscretionaryspendingwhichwillnegativelyaffectthemyofPrinceEdwardIslandThankstoasurgingasNovaScotiaslargestindustryinasthehousingmarketcoolswellseeoutputinthisdeclinebringingdowneconomicgrowthwithitOverineasedinvestmentintheminingindustryenoughtokeeptheprovinceoutofrecessionalthoughthatsupportwillhelpmitigatetheimpactofaslowdownindomesticdemand.ngmarketdownturnwillbemorepronouncedinentralCanadaandBritishColumbiaOntarioandBritishColumbiahavebyngmarketsandthereforethehighestdebtnsWithinterestpaymentsrisingdebtservicingcostswillhavetheintheseprovinceswithmostsectorsoftheeconomybeinggpowerRubbingsaltintononforeignhomebuyersandvacanttaxincreasesthatwillfurtherweighonthehousingoutlookintheseprovinces.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.1111reveryexposeditionsintheUnitedStatessotheuthoftheborderwillnegativelyportprospectsThiswillbringdowngrowthinbothprovinces.yisnowexpectedtoenterarecessiongivenitshighdebtlevelstrailingonlyitishColumbiaandOntarioandthereductiondfromtheUnitedStatesDespitewnturninitshousingmarkettobemildrelativetootherprovincesrongpopulationgrowthwillhelpAlbertaemodestpullbackexpectedinenergydemand.20212022202320212022202320242-0.34-1.5-1.1-1.56-1.3-1.3-0.7-1.1-1.3ertaSources:StatisticsCanadaandDeloitte.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.1122althoughtsEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.13cloudedbyuncertaintyThebiggestriskisthatthepastyearsinterestrateincreaseswillbemoreconsequentialthanteddownturnTheresstillariskthatpolicymakerswillraiserateshigherthanweexpectwhichwouldalsoleadtoadeepereconomicdeclinebothhereandintheUnitedStatesOnepotentialupsideisthatconsumerscouldchoosetonotcutbackontheirnsteaddrawdowntheirsavingsordefertheirhigherinterestpaymentsbyextendingmortgageamortizationsightlabourmarketsthereareafewthingsthatbusinessescandotoweatherthestorm?Theycanconductascenarioanalysisthataccountsforupsideanddownsideriskstotheeconomicoutlook,toassesshowrevenuesandprofitsmstancesHavingthisinformationandknowinghowtoidentifywhentheserisksbegintomaterializeequipsthemtoquicklyshiftgearsandadoptnewplansifnecessary.?Theycanbestrategicwiththeirstaffingplans.Despitetheloomingrecession,arecentsurveyreportedonbyBNNBloomberginDecemberworkersplantolookforanewjobinthefirsthalfofwithindemandprofessionalslookingtoleveragetightmarketstochangejobsandboosttheirearningsCompaniesthatarefacingtalentshortagesshouldbeseekingtoidentifyanddirectanyionmeasurestotopperformers?Theycanalsobestrategicwiththeirinvestmentplans.Organizationswillneedtocarefullyconsiderwhatresourcesthey’llneedwhenthensuretheyrereadytorespondwhendemandbeginstoacceleratedtogrecessionissimplythelatestwaveEconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.1144Keyeconomicindicators2022202322F23F24Fmicactivityproduct-2.2-1.6-0.9ture-1.0-0.1-0.3Durablegoods-8.2-1.8-1.8-1.3-3.3-2.7Servicesment-31.5-4.1-2.7-1.6-10.6-7.9ixedinvestmentNonresidentialstructures-0.2Machinery&equipment-1.3-7.6consumptioninvestment-2.2-3.2-0.2-0.6ices-7.6-4.6es-1.5-1.0merpriceindexyyeindexyy-1.5-1.3oteUnlessotherwisenotedallfiguresareexpressedasannualizedchangesSourcesStatisticsCanadaandBankofCanadaForecastbyDeloitteEconomicAdvisory,asofDec.13,2022.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.152022202322F23F24FQ1FQ2FQ3FQ4FQ1FQ2FQ3FQ4FInterestrates(%)Overnightratetarget0.331.172.753.954.082.044.213.113-monthT-bill0.641.684.314.284.082.414.263.091-yearGoCnote1.402.583.654.464.684.624.604.413.024.583.452-yearGoCnote1.712.723.494.134.334.324.334.213.014.303.485-yearGoCnote1.962.803.143.774.022.924.173.7010-yearGoCbond2.082.952.993.553.853.994.013.79Yieldcurvespread(pp)3-monthvs.10-year1.441.30-0.24-0.58-0.53-0.33-0.180.050.48-0.250.692-yearvs.10-year0.370.23-0.50-0.58-0.49-0.34-0.23-0.08-0.12-0.290.30ForeignexchangeUSD/CAD($C)1.271.281.311.361.361.341.334.30CAD/USD(UScents)0.790.780.770.740.740.740.750.760.770.750.77Sources:StatisticsCanadaandBankofCanada.ForecastbyDeloitteEconomicAdvisory,asofDec.13,2022.EconomicoutlookJanuary?DeloitteLLPandaffiliatedentities.1166thleadersinmacroeconomicsmicroeconomicsp