Is Canada Facing a Recession in 2024?

Canada appears likely to avoid a recession despite persistent headwinds from elevated interest rates, according to Deloitte Canada’s economic outlook. The firm highlighted several concerning trends that continue to weigh on the economy, including stubborn inflation, a rise in business insolvencies and growing mortgage delinquencies. These factors keep the outlook cautious even as other indicators begin to improve.

“Against this backdrop, we remain cautious about the near-term outlook,” Deloitte said in its report. “But based on its current trajectory, Canada appears likely to skirt a recession and even seems poised to begin recovering from its current slump in the second half of this year.”

Are inflation and recessions related?

To rein in rapid inflation, the Bank of Canada raised its policy rate from nearly zero in early 2022 to 5% through a series of increases. Those higher borrowing costs have cooled demand and helped bring inflation down from its peak. Deloitte notes that, with inflation moderating, the Bank of Canada is positioned to begin cutting rates as early as June, with many economists expecting initial easing steps in June or July.

Even so, Deloitte expects Canada’s economy to be essentially “stuck in neutral” in 2024, particularly during the first half of the year. The firm projects real gross domestic product (GDP) growth of roughly 1% in 2024 before a stronger rebound in 2025, when GDP is expected to rise closer to 2.9% as monetary conditions ease and demand recovers.

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GDP’s effect on a recession

Deloitte’s forecast rests on several key assumptions: continued solid growth in the United States, ongoing moderation in inflationary pressures, timely interest-rate cuts from the Bank of Canada and steady population gains that support demand. These factors together would reduce the risk of a prolonged downturn in Canada.

Statistics Canada reported that GDP rose 0.6% in January, with a preliminary estimate of 0.4% growth in February. Deloitte emphasizes that a broader economic recovery depends on interest-rate reductions, which themselves are contingent on inflation slowing further and staying under control.

“The good news is that measures to cool inflation have made significant progress,” the report notes, while warning that many of the forces keeping inflation elevated—such as higher shelter costs and supply-side constraints—are unlikely to reverse quickly.

Will home prices and unemployment drop in 2024?

Housing costs remain the most significant drag on the recovery. Many homeowners are renewing mortgages at much higher rates than before, and renters also face rising shelter expenses. These higher housing costs are squeezing household budgets and weighing on consumer spending.

Wage growth continues to outpace inflation, but without a matching rise in productivity. That gap raises unit labour costs for businesses and makes it harder to bring inflation back to target. Nonetheless, the labour market has remained resilient to date, though Deloitte expects employment gains to slow considerably through 2024.

Household spending is expected to be restrained in the first half of the year as families adjust to higher living costs and elevated borrowing costs. Deloitte believes conditions should improve in 2025 as interest rates ease, the economy strengthens and pent-up demand is released. The report also warns that business investment is falling at a worrying pace, and persistently high interest rates this year will likely constrain corporate capital spending and slow the investment recovery.

What will interest rates be like in 2024?

High interest rates have weakened demand and dented business confidence. Many firms are delaying expansion and major projects, concentrating instead on maintenance and short-term cash management. This retrenchment in investment contributes to the cautious growth outlook for the near term.

The United States economy has so far shown more resilience under higher rates, and U.S. policymakers are also expected to begin easing policy later in the year. Deloitte projects that the U.S. will slow but still post positive real growth, which in turn should help support Canadian exports and growth through cross-border trade and investment.

Read more about Canada’s economy:

• Fixed or variable mortgage rate: Which should you choose in 2024?
• Five financial buzzwords that kept appearing in 2023
• What does the new Canadian Mortgage Charter mean for homeowners?
• Is Canada in a recession? — Common questions about the economy, answered