This year should mark a return to the “Great Moderation” of slow but steady economic growth and low inflation that characterized the G10 largest economies prior to the pandemic.
Canadians will see a return to near-normality this year, as inflation eases, interest rates stop rising, and housing and stock-market values bottom out.
But continued inflation, though considerably lower as the year progresses, and high debt-servicing costs could trim average household purchasing power by almost $3,000 this year, warns RBC Economics. For that reason, forecasters expect a mild and brief recession early this year, with a return to GDP growth in the second half.
With the irrational exuberance of the past two years finally wrung out of the economy, 2023 should set the stage for a welcome return to modest but durable gains in GDP and in housing and other asset values, after 2022’s value destruction in everything from condos to crypto.
Here are some forecasts for leading indicators of economic health.
Housing prices, which have already come down about 20 per cent in the past year, are expected to fall another 10 per cent in 2023, with declines tapering off during the year. From that bottom, house prices will resume a sustainable growth rate in 2024 of about four per cent. Record-high levels of immigration will help drive those gains. But with only about 1.3 million Canadian housing starts expected this decade (immigration alone will add at least 1.5 million Canadians), housing affordability will continue to be a problem for years. The affordable housing shortage will be acute in the GTA, which is edging out Vancouver as the country’s most expensive place in which to live.
Inflation will continue coming down this year, after a sharp decline in 2022 from a peak of 8.1 per cent last summer to 6.7 per cent by year end. Inflation will drop further in 2023 to an annual average three per cent range, with some forecasters expecting inflation to end the year at close to two per cent. For that we can thank higher interest rates; the economic slowdown that began in last year’s second half after torrid, inflationary growth in 2021 and 2022; and a sharp decline in all-important energy prices. Having dropped by double digits in last year’s second half, oil and natural gas prices are expected to decline by another seven per cent and 11 per cent, respectively, in 2023.
Interest rates. The era of cheap money that dates from the Great Recession is over. Borrowing costs will remain higher than in the pre-pandemic era for the next several years. Canadians keeping their credit-financed purchases to a minimum are wise to do so. In its mission to destroy inflation entirely, the Bank of Canada (BoC) will continue raising its key, or target, interest rate this year to as high as 4.5 per cent. That’s an extraordinary 18-fold increase in borrowing costs over the 0.25 per cent of early last year. The bank will eventually stop hiking rates this year, and we might even see the first rate cut in 2023’s fourth quarter. And the bank’s key rate will be further reduced in 2024 to an annual average of 2.7 per cent. But the key rate is forecast to stay at about 2.0 per cent for several years thereafter, or eight times the rate in early 2022.
Mortgage rates. As many as 18 per cent of fixed-rate mortgages in Canada are scheduled for renewal this year and rate increases at renewal will be as much as 1.6 per cent higher than when the original mortgage was issued. In an example given recently by TD Economics, a homeowner with a $500,000 five-year fixed-rate mortgage taken out in 2017 at that year’s prevailing interest rate can expect a $700 increase in the monthly mortgage payment on renewal. TD Economics warns that “Mortgage holders will continue to face higher mortgage payments on renewal, as interest rates remain higher than the rates that prevailed when these mortgages were issued.”
Wild cards. Russia’s war on Ukraine and China’s rampant COVID-19 infection rate could continue this year to impair global supply chains. Energy disruptions related to the Ukraine war have dampened economic growth in Europe, one of Canada’s major trading partners. And with an estimated 9,000 people dying each day of COVID-19 in China, according to recent U.K. researchers’ analysis, China remains an unstable source of supply.
Bottom line: Canadians have endured a record number of systemic shocks over a shorter period than ever in the modern era, and the country is performing as well or better than its economic peers. Relief from the hardship is already evident. So, unlike 2022, this will not be a year of living dangerously. But caution is in order until normality is in full flower next year and in the decade to come.
