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Economic Viewpoint

Back to the Future: What It Would Take to Get a 1990s-Style Recession in Canada

November 24, 2022
Randall Bartlett, Senior Director of Canadian Economics • Lorenzo Tessier-Moreau, Principal Economist

  • Our baseline forecast is for a mild recession in Canada in the first half of 2023. We continue to view this as the most likely scenario (50% chance of occurring). In 2023, annual real GDP growth is expected to be flat while real household consumption should advance by 1.6%.
  • Risks to the baseline forecast are tilted to the downside. If households dig in by slashing consumption and keeping the savings rate elevated, real GDP growth could contract like it did in the early 1990s. In this downside scenario (as much as a 30% chance of occurring), we could see real GDP fall by 1.5% in 2023 and real household consumption decline by 1.1%.
  • Materially lower consumption will have knock-on effects on the labour market. In the downside scenario, employment shrinks by 0.3% in 2023 (vs. a 0.3% advance in our baseline scenario). As a consequence, the unemployment rate rises to 7.0% in 2023 (vs. 6.5% in our baseline). With employment and household income falling, other real GDP expenditure categories such as residential investment would also move lower relative to our baseline forecast.
  • We expect this would prompt the Bank of Canada to reverse course sooner than in our baseline scenario. Indeed, we anticipate the Bank could begin cutting interest rates as early as the second quarter of 2023 if the downside scenario comes to fruition. The overnight rate could reach 3.00% by the end of 2023 vs. 3.50% in our baseline projection.