BMO Financial Group expects North American economies will go through a shallow recession in 2023, according to Douglas Porter, the bank’s chief economist and managing director, during a session at the Canadian Investment Review‘s 2022 Defined Benefit Investment Forum.
“I would give it a 25 per cent chance that central banks can still negotiate this without one. On the flip side, there’s about a one in four chance things turn out much worse.”
The last time the Canadian economy saw double-digit inflation — in 1982 — the central bank was unable to avoid a recession, he noted, adding inflation contracted by 2.9 per cent as it was squeezed out of the economy. “Essentially, that’s what the central banks are trying to avoid. By raising rates so aggressively, they want to make sure we don’t go through another decade of high and volatile inflation which ends in a terrible recession.”
Looking to 2023, Porter said BMO anticipates a further slowdown for the global economy. “We see growth ebbing by about a percentage point or so. I’d regard two per cent growth for the economy as an important level because if you get below that it’s generally considered a recession. All it would take is one significant negative shock to tip us into an outright global downturn.”
Many economic trends have reversed in 2022, he said, referring to petroleum prices — which peaked mid-year and are now sitting at multi-year lows — as one significant example.
While the oil and gas sector may be in trouble as a result of that reversal, food prices, which rose 11 per cent in the last year, are having a much broader impact, he noted. “One of my colleagues just did a report on food prices looking forward and we’re not optimistic that this is going to back down anytime soon. We’re concerned food prices will remain a thorn in our side for some time yet.”
According to Porter, mortgage rates are another significant factor that will continue to impact the Canadian economy. He referenced the Bank of Canada’s rate hikes incurring the country’s households record levels of debt. “What’s interesting this time is that squeeze has been delayed. If you’ve got a variable mortgage rate, you may not face higher payments yet. Eventually, we’ll see a real squeeze which is going to seep in over the next few years.”
Porter also highlighted the lack of skilled workers as a challenge facing the economy as it’s causing wage pressures to rise. “We’ve got one of the tightest labour markets we’ve seen in 50 years on the one side and we’ve got workers trailing behind inflation on the other. To me, that’s the recipe for labour market turmoil.”
However, BMO predicts inflation will come down to two per cent by the end of 2024. While Porter acknowledged that number looks aggressive, he cited the pattern from the two periods of inflation during the 1970s as evidence. “After oil prices peaked in both episodes, inflation did come down pretty quickly. But the mistake policy-makers made in the [first episode] is they didn’t keep their foot on the brake long enough when inflation started coming off. So then it came roaring back a second time when oil prices spiked later in the 70s.”