Canada Already In Recession, Hard Landing To Cool Inflation: Oxford Econ

Canada’s economy isn’t just slowing down, it’s already in recession. That’s the take from prominent macro research firm Oxford Economics, whose latest research brief sees a hard landing coming. In the unlikely event a soft landing occurs, they see higher inflation and even higher interest rates. 

Canada Is Already In Recession, Hard Landing Expected

The firm is the latest to state Canada is already in a recession. They point to recently reported Q3 GDP, which showed a quarterly decline of 0.3% (-1.1% annualized). This is in contrast to the Bank of Canada (BoC) quarterly expectation of 0.2% (+0.8% annualized). Despite GDP per capita showing negative growth for some time, the firm sees Q3 as the official start of the recession.  

Bank of Canada Overestimating Economy’s Strength

Canadian real GDP growth forecast comparison. 

Source: Oxford Economics.

“We believe the Canadian economy has slipped into a moderate recession that will create slack, ease price pressures and help bring headline CPI inflation back to the 2% target by late 2024,” explains Tony Still, Director of Canada Economics at the firm. 

Adding, “Moreover, weaker global oil and food prices will facilitate the slowing of inflation this year.” 

Canadian Inflation To Slow Faster Than The BoC Expects  

For those following forecasts closely, the return to target is much faster than others have predicted. That’s because they see a hard landing, which will cool inflation much faster. That’s the trajectory the economy is currently on, but various factors can soften the blow. Whether a soft landing would be good news? It depends on who’s asking, but generally not for consumers. 

“In contrast, many other forecasters including the Bank of Canada (BoC) still anticipate a soft landing for the economy. The BoC expects CPI inflation will return to its 2% target towards the end of 2025 – about a year later than our baseline recession forecasts,” said Stillo. 

The seriousness of the recession will have a big impact on interest rates and where they’re heading. 

A Hard Landing Expected, Or Higher Inflation & Interest Rates   

Most people have their sights set on falling interest rates, but that may not be the case. Stillo’s baseline forecast includes a hard landing, taming inflation faster than the BoC expects. As a result, their baseline forecast also sees interest rates falling much sooner than the BoC likely anticipates at this point.

“In our baseline recession forecast, further hikes in the overnight rate by the BoC are not warranted. We expect the central bank will hold firm at 5% until June, when it will begin to gradually lower the policy rate to 4.25% by the end of 2024,” he says. 

A Hard Landing Will Return Canadian Inflation To Target Faster

Canadian baseline recession forecast (hard-landing) vs soft-landing scenario. 

Source: Oxford Economics.

Generally speaking, the longer inflation takes to fall, the more likely it is to become ingrained. Stubborn inflation requires higher interest rates. Most analysts at this point are calling a soft landing along with rate cuts, and unicorns. Okay, maybe not the last part—but they might as well, when contrasted with Stillo’s outlook. 

“Critically, our soft-landing scenario also suggests the BoC would very likely have to end its current pause and hike the policy rate by another 50 bps to 5.5% by mid-2024,” he explains.