RBC is expecting a recession sooner than later

1. October 12, 2022
Proof Point: Canada’s recession to arrive
earlier than expected
• In previous work, we projected a moderate recession for Canada’s
economy in 2023. We now believe this downturn will arrive as early
as the first quarter of next year.
• Higher prices and interest rates will shave $3,000 off the average
household’s purchasing power, weighing on goods purchases.
• And the jobless rate will near 7% while remaining less severe than
in previous downturns.
• As debt-servicing costs increase and purchasing power declines,
lower income Canadians—many already adjusting to the loss of
pandemic support—will be hit hardest.
• The bottom line: The pain of the upcoming recession won’t be
distributed equally among Canadian businesses and households.
The manufacturing sector will likely be among the first to pull back
while some high-contact service sectors like travel and hospitality
could prove more resilient than in a ‘normal’ historical recession.
Signs of strain are emerging as interest rates rise
Cracks are forming in Canada’s economy. Housing markets have cooled
sharply. Central banks are in the midst of one of the most aggressive rate-
hiking cycles in history. And while labour markets remain strong, employment
is down by 92,000 over the last four months.
Proof Point: Canada’s recession to arrive earlier than expected
RBC Economics <economics@newsletters.rbc.com>
Wed 2022-10-12 8:58 AM
To: paul_young_cga@hotmail.com <paul_young_cga@hotmail.com>
Firefox https://outlook.live.com/mail/0/deeplink?Print
1 of 5 2022-10-12, 9:01 a.m.

2. And the pressure is still building. While the Bank of Canada is expected to lift
the overnight rate to 4%, the U.S. Federal Reserve will likely hike to between
4.5% and 4.75% by early 2023. These factors will hasten the arrival of a
recession in Canada—which we now expect to start in the first quarter of 2023
(one quarter earlier than our previous projection).
What happens next will depend on a range of factors, with interest rate
increases the most significant among them. Central banks will be reluctant to
throw in the towel on rate hikes before they are confident that inflation will
slow sustainably. We expect the Bank of Canada to pause its rate-hiking cycle
in late 2022 followed by the Fed in early 2023. But that’s contingent on
inflation pressures easing. More stubborn inflation trends over the coming
months could yet prompt additional hikes, and a potentially larger decline in
household consumption and a deeper recession.
Jobs will be lost and lower-income Canadians will be hardest hit
As it stands, the labour market is the tightest it’s been in decades. An excess
of job openings and a scarcity of workers will protect against a major spike in
unemployment in the very near-term. The jobless rate will still rise, but we
expect longer job search times for the unemployed, and hours cut for the
employed at first.
More outright layoffs will follow, and we expect the weakening in the economy
Firefox https://outlook.live.com/mail/0/deeplink?Print
2 of 5 2022-10-12, 9:01 a.m.

3. will push the jobless rate close to 7% by the end of 2023—up almost 2
percentage points from lows of 4.9% in June and July. This is slightly higher
than our previous forecast but still low relative to previous downturns.
That said, households are already feeling the squeeze of economic headwinds.
Rising inflation and higher borrowing and debt servicing costs are expected to
shave almost $3,000 from average purchasing power in 2023. And while
drum-tight job markets have pushed wages higher, it hasn’t been enough to
offset these losses. This will weigh most heavily on Canadians at the lower end
of the wealth spectrum, particularly those whose disposable income has faded
alongside pandemic support.
A (relative) bright spot: travel and hospitality
The pain of the upcoming recession won’t be distributed equally among
Canadian businesses either. Housing markets have already corrected lower.
And the manufacturing sector looks poised to soften as spending on physical
merchandise cools, particularly in the U.S., the world’s biggest consumer
market and destination for 75% of Canadian exports (65% of which are
‘manufactured’ products). In Canada, despite still-strong manufacturing
output, surveys have already flagged deteriorating sentiment among
businesses in that sector.
While they won’t escape unscathed, the travel and hospitality sectors—among
the hardest hit by COVID-19 restrictions—could be more resilient than in past
Firefox https://outlook.live.com/mail/0/deeplink?Print
3 of 5 2022-10-12, 9:01 a.m.

4. downturns. Resilience in the broader services sector compared to goods
producing industries like manufacturing wouldn’t be a new phenomenon.
Public-sector services jobs like teachers and healthcare workers typically
decline less (if at all) in recessions. That’s also been true of the professional,
scientific, and technical services jobs—the largest source of employment
growth from pre-pandemic levels (+17%). But in the accommodation and food
services sectors, where recessions typically have a more significant impact on
spending, job losses are usually a lot smaller than in manufacturing. And this
time, there remains lingering demand for travel and hospitality services after
two years of pandemic lockdowns. That will limit a pullback in these sectors in
2023.
Travel and hospitality business will likely be among the most hesitant to resort
to layoffs. Indeed, employment in accommodation and food services was still
running 15% below pre-pandemic levels in September. That’s three times the
average decline in recessions dating back to the 1980s. That means
businesses are already staffed at levels below what you would expect in a
major economic downturn. As a result, they’ll be less likely than ‘normal’ to
resort to layoffs.
Nathan Janzen
Assistant Chief Economist | Royal Bank of Canada
nathan.janzen@rbc.com | 416-974-0579
Firefox https://outlook.live.com/mail/0/deeplink?Print
4 of 5 2022-10-12, 9:01 a.m.

5. Claire Fan
Economist | Royal Bank of Canada
claire.fan@rbc.com | 416-974-3639
Proof Point is a production of RBC’s Economic group and is part of the Daily Economics Update
series.
DISCLAIMER
Edited by Naomi Powell, Managing Editor – Economics & Thought Leadership –
naomi.powell@rbc.com
This daily newsfeed offers general information only and is not intended as legal, financial or other professional advice. While
information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a
complete analysis of the subjects discussed. This communication is not an offer or solicitation for the purchase or sale of any
security, and is not to be relied on for investment purposes. No endorsement of any third parties or their advice, opinions,
information, products or services is expressly given or implied by Royal Bank of Canada. This communication is not intended
to be shared outside of the Royal Bank of Canada without prior consent.
-
Privacy & Security | Legal | Unsubscribe
-
RBC Royal Bank | Royal Bank of Canada
200 Bay Street, South Tower, 9th Floor, Toronto, ON M5J 2J2, Canada | www.rbc.com/economics
®/TM Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of
Canada
© Royal Bank of Canada 2022
To manage your email preferences, please visit our Subscription Preferences Centre.
Firefox https://outlook.live.com/mail/0/deeplink?Print
5 of 5 2022-10-12, 9:01 a.m.