Deloitte study | A recession is not inevitable

Deloitte thinks a period of stagflation is more likely

Posted at 5:00 am

Richard Dufour

Richard Dufour
The press

Although a significant slowdown in economic growth is expected in Canada, and in particular in Quebec, from next year, Deloitte does not expect the country to slide back into recession.

“The battle is not lost yet,” says Mario Iacobacci, Partner, Economic Consulting Services, at Deloitte Canada. “It is possible to successfully bring down inflation without triggering a recession. »


Mario Iacobacci, Partner, Business Advisory Services, at Deloitte Canada

The management of this financial advisory firm recognizes that this forecast of avoiding a recession may seem optimistic to some, and that’s a view that differs significantly from consensus.

The most likely scenario, according to Deloitte, is one in which growth slows but inflation cools only slowly. According to Deloitte, a phase of stagflation therefore seems more likely than a recession.

Canada’s gross domestic product (GDP) is expected to grow 3.3% this year before slowing to a pace of just 1.7% next year and 1.5% in 2024, according to a study published on Tuesday by Deloitte forecasters.

The document makes several arguments for resilience.

wealth of private households

In particular, Deloitte notes that Canadians have amassed more than $300 billion in savings during the pandemic, which is helping cushion the rising cost of living and keep Canadians spending.

Household wealth has also increased during the pandemic, she added. “Wealth gains should remain intact and even allow equity markets and house prices to correct. Labor markets in particular are likely to remain saturated during the coming economic downturn. The unemployment rate will remain low as more baby boomers retire. »

Deloitte also notes that there will be an abundance of jobs for working-age Canadians and strong wage growth, a key driver of consumer sentiment.

Less dark than it looks

While tighter monetary policy will push up debt-service costs, Deloitte notes that it will also lower the rate of cost-of-living growth, which is good for consumers.

So the situation is not as bleak as the headlines suggest, Craig Alexander, chief economist at Deloitte Canada, suggests in the study.

The former chief economist at TD Bank agrees that high inflation and rapidly rising interest rates could lead to a recession, “but that’s not a given.”

If inflation doesn’t come down as expected or central banks hike rates above forecasts (ie above 3%) then a recessionary scenario becomes likely, he said.

Beware of autosuggestion

In its study, Deloitte affirms that we must not forget that recessions can be psychological events.

Self-fulfilling predictions occur when everyone expects a recession and pretends it is inevitable.

Deloitte, in its study

Deloitte expects price pressures to ease slowly as inflation peaks near its current rate of just under 8% in the third quarter of this year, before gradually declining. “On the other hand, it will not reach the 2 percent target set by the Bank of Canada at least before 2025.”

In response to high inflation, the Bank of Canada began raising its overnight interest rate target this year. Deloitte expects another rate hike in July (50 basis points), followed by hikes of another 25 points in September, October and December. “A final hike in early 2023 would bring the overnight rate to 3%, which should then stabilise. »

Profitable for Quebec?

With inflation higher in the US, the Federal Reserve favors a more aggressive pace of tightening, leading Deloitte to expect the fed funds rate to hit 3% by the end of this year.

Deloitte believes that Quebec will benefit from strong growth in public spending in the near term, but high inflation will hurt consumer spending power.

“Combined with weaker population growth, this phenomenon will put pressure on household spending and investment. »

Tightening of the job market is another factor affecting growth, and to that end Deloitte points out that Quebec has the second highest job vacancy rate in the country after British Columbia. According to Deloitte, Quebec’s real GDP is likely to grow by 2.9% this year before leveling off at 1.3% next year.

The “normal” growth rate, when there is no negative or positive shock, is closer to around 1.5%, says Mario Iacobacci.

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