A Canadian recession model constructed by Oxford Economics shows the country’s economy has crossed a critical threshold indicating a recession is “imminent,” with the firm’s director of Canada economics, Tony Stillo, warning in a report this week a moderate downturn will start in the next quarter and last until the middle of 2023.
The model, which tracks five macroeconomic and financial indicators, including the spread between the yields on Government of Canada 10-year and three-month debt, Canadian stock prices and energy’s share of the Bank of Canada commodity price index, has predicted four of the past six downturns in Canada.
The two exceptions, Mr. Stillo says, followed the 2014 collapse in oil prices and the onset of the pandemic in 2020, two episodes triggered entirely by external factors.
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In its forecast Oxford predicts the Canadian economy will shrink 1.8 per cent over three quarters, a slowdown which would be similar in length but shallower than the “typical” Canadian recession over the past 50 years.
And while Mr. Stillo believes the chance of a recession turning into a deeper financial crisis remains low, he warned heavily indebted Canadian households and the housing market will feel the brunt of the pain.
As of August, house prices had fallen 16 per cent from their February peak, and Oxford predicts the correction won’t end until prices are down 30 per cent from their peak. That would still leave prices 7 per cent above their prepandemic level, meaning those most at risk are homebuyers who rushed into the market over the past two years.
Even so, with rising interest rates, high inflation and an unemployment rate that’s predicted to rise to 8 per cent from 5.4 per cent in August, Oxford warns consumers will be squeezed into slashing spending and reining in their debts.
Jason Kirby