Posthaste: 'Here comes the pain': Recession on tap for North America, BMO says

Victoria Wells
Wed, November 9, 2022 


Both Canada and the United States are at risk of falling into a recession next year as central banks push interest rates higher to tackle stubborn inflation, according to the latest outlook from BMO Capital Markets.

“We believe the odds of a North American recession are greater than even,” said Sal Guatieri, senior economist at BMO Capital Markets, in a note titled “Here comes the pain again.”

Economists at the bank expect Canadian gross domestic product to fall more than three percentage points next year amid deteriorating financial conditions brought on by a crumbling housing market, a weak stock market and more interest rate increases. Lower prices of oil and gas and other commodities will also take a toll on Canada’s growth. In the U.S., GDP is expected to fall by two percentage points next year. The contraction in both countries will be centred in the first half of the year, in what Guatieri called a “shallow recession.”

Falling home prices are one factor at play in the coming downturn, and have already sheared off growth in both countries. But the damage isn’t over yet. BMO expects prices to slide a total of 20 per cent in Canada and 15 per cent in the U.S. before the market stabilizes, adding further pressure to the economy.

Meanwhile, interest rate hikes will continue to cause pain. BMO thinks the Bank of Canada will keep raising rates more than originally anticipated, bringing them up another 75 basis points before pausing at 4.5 per cent for the benchmark. The U.S. Federal Reserve will follow a similar path, with rates peaking between 4.75 and five per cent.

At the same time, flush household savings accounts, which helped fuel growth after pandemic lockdowns, are unlikely to save the day this go around. Many people are likely scraping the bottom of the barrel at this point, after deploying their savings to pay for the rising cost of living and higher debt costs. “No cavalry is around the corner to rescue the economy or markets,” Guatieri said.

But just how far the economy slides depends on how fast inflation falls back to its two per cent target. So far the rate has proved stubborn, and economists aren’t sure it will cool very quickly, meaning inflation might still come in at three per cent on a year-over-year basis even into the latter months of 2023.

To add to the pain, a low Canadian dollar could further fuel price increases. BMO expects the loonie to sink even more, hitting 72.5 cents U.S. by the end of 2023. There are other geopolitical risks to watch out for, too, including the continued conflict in Ukraine and strained ties between the U.S. and China, BMO said. Added together, it signals North America is walking straight into a downturn.

The forecast won’t come as news to most Canadians, who are feeling gloomy about the economy’s prospects. More than half, or 55 per cent, think the country is in a recession already, and another 68 per cent believe we’ll enter one in 2023, according to one survey released this morning from IG Wealth Management. Other consumer polls back up the pessimistic view. Maru Public Opinion’s Canadian household outlook index fell to 87 in October from 93 in September, a six-point drop. John Wright, Maru’s executive vice-president, called it “the bleakest and most biting outlook” he’s ever seen.

Still, there is good news for those bracing for tough economic times. Guatieri said BMO isn’t expecting the coming recession to be a lasting one, and said relief will come fairly quickly.

“The downturn is likely to be moderate and short-lived,” he said.