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Canada's Economic Update and Recession Risks 2023 | MUST KNOW Tax Benefits

Updated: Dec 25, 2022

The government of Canada released its outlook for a recession in 2023 through the latest 2022 Fall Economic Statement released just a few days ago, hot off the press, on November 3rd, and it's not looking so optimistic.

With food costs up 11% compared to last year, spikes we haven’t seen in 40 years, and experts warning that recession is just around the corner - it's time to take in the reality of what's going on and to prepare for the worst.

Today, I will be going over some highlights from the 96-pager 2022 Fall Economic Statement by the Canadian Government, as well as some measures and benefits put in place to lift some of the financial burdens felt by Canadians.

2022 Fall Economic Statement

Do you want the good news or the bad news first? How about, the good news first to soften the landing on what is going on in the current economy?

Good news

Canada’s economic recovery from the pandemic recession has been strong, with GDP (gross domestic product) returning to pre-pandemic levels in the last quarter of 2021 - the fastest recovery of the last three recessions.

The recovery continued in the first half of 2022 and at a faster pace than other advanced economies in the world in the G7.

You may have heard that the job market has rebound and the unemployment rate is near record lows at 5.2% in September which is above pre-pandemic levels.

All of the above resulted in better-than-expected results of a $36.4 billion expected deficit in 2022-2023, which is below what's outlined in the 2022 Budget of a $52.8 billion deficit - which is a 16.5 billion difference in estimates.

Though mind you, those are still very high debt numbers. For comparison, we come from a deficit of $25.3 billion in 2019 and a surplus of $2.7 billion in 2018.

Based on “baseline” or maybe “optimistic” projections are that we will be in a $4.5 billion surplus by 2027-2028, which is 5 years from now. But that is not the full story. Signs of economic growth have slowed and recession risks have increased. And we will get into why that is the case.

Bad news

Time to share the bad news. If you haven’t been living under a rock, you would know that inflation is the biggest challenge, globally. While it was expected from the pandemic when money was being thrown left and right, the current war in Europe is causing additional havoc on the supply chain issues combined with rebounding demand, driving up prices for goods and services.

While there has been some improvement in the global supply chain issues, there has been somewhat of an easement in inflation in Canada, combined with monetary policies, while other countries like Italy, Germany, and the UK are still seeing accelerating inflation. As hard as it is to believe, Canada is actually on the lower end of the scale for experiencing CPI.

As for Canada, inflation declined from its peak at 8.1% in June to 6.9% in September, and with the aggressive interest rate hikes by the Bank of Canada, plan to bring it down to the target inflation of 1 to 3% by 2024.

Canada had been the most aggressive with its interest rate hikes, with policy interest rates having increased by 3.5% in 2022 alone. The US, as our next-door neighbour and the largest economy in the world, has also been increasing its rates aggressively, which was expected to peak just above 3%, now markets are seeing rates peak above 5%.

Perhaps the biggest pain point for Canadians is the mortgage interest rates that have been increasing for variable rates or for those with fixed rates with mortgage renewals coming up.

To make it worse, the Canadian real estate market is experiencing a sharp pullback from unprecedented heights during the pandemic. Resales are down 36% from their peak in February and house prices are down 9%.

Based on a survey done in September 2022 with private sector economists, mostly financial institutions like banks, they forecasted a roughly 40% probability of a recession in 2023. However, since September, the economic landscape has worsened with more volatility in the markets, which increases the chance of a recession as the global economy is slowing more quickly than anticipated.

While the 96 pager has an optimistic “baseline” forecast in which Canada would avoid a “hard landing”, you would also need to consider the fast pace of changes happening in the economy. It would also be naive to not consider the significant downside risks.

While the baseline forecast indicates positive GDP growth, the “downside scenario” takes a sharp plunge in 2023. This also means significant deficits in the budget of -52.4 billion in 2023 to 2024, and working towards a deficit of -8.3 billion in 5 years time in 2027-2028.

But what does all this mean? It means that it's nearly impossible to forecast what is going to happen in the future - like the pandemic and the war in Europe, there are so many moving factors. Even private sector industry experts were so far off from their estimates for both inflation and interest rate projections. Private sector economists were optimistic in earlier budgets about how soon we would be back to “normal” inflation rates, which is now a year off from 2023 to 2024, and interest rates are a full 2% higher compared to their projects from just this February 2022.

Next, we will be diving into some key changes happening that may benefit you.