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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.

NEW Benefits put in place by the Government of Canada

1. New $40k Tax-Free First Home Savings Account is expected to be available to Canadians in mid-2023. It gives prospective first-time home buyers to save up to $40k tax-free, with contributions being tax deductible, and withdrawals to purchase a home being non-taxable. It’s the best parts of an RRSP and TFSA combined.

  1. Also, if you are looking to buy a home, keep in mind the first-time home buyer’s credit which doubled and provides up to $1,500 in direct support to home buyers to cover increasing closing costs.

2. Lowering Credit Card Transaction Fees for Small businesses

  1. The government is planning to enter negotiations with payment card networks, financial institutions, etc to lower credit card transaction fees for small businesses.

3. Eliminating interest on Federal Student and Apprentice Loans

  1. During the pandemic, the government waived interest charges on student loans for two years. As this support expires on March 31, 2023, the government is proposing to make all Canada Student Loans and Canada Apprentice Loans permanently interest-free, including those currently being repaid, beginning on April 1, 2023.

4. Making Housing More Affordable

  1. Effective January 1, 2023, Parliament passed legislation to implement a two-year ban on non-Canadians purchasing residential property in Canada, which aimed to curb speculation and ensure homes are being used for Canadians to actually live in, and not used as financial assets as foreign investors.

  2. There is also a 1% “underused housing tax” on property that is vacant-owned by non-residents or non-Canadians.

  3. There will also be GST/HST to assignment sales of newly constructed or substantially renovated residential housing effective May 7, 2022. Assignment sales are when a home is resold before it is constructed or lived in, usually occurring in “flipping.”

5. Doubling of GST Credit for 6 months

  1. For around 11 million low and modest-income people and families, they will receive double GST credit for 6 months - this can range from an extra $234 for single Canadians upwards to $467 for couples with two children. If you are eligible, you will be receiving these payments automatically as a GST credit recipient.

6. There are also other benefits related to Canada Dental Benefits, Top-Up to Canada Housing Benefit, Automatic Advance for Canada Workers Benefit, and more covered in the 96-pager.

On an interesting note, the government finally plans to address the digitalization of money, mainly related to the rise in cryptocurrencies, and announced the government's intention to launch a financial sector legislative review focused on the digitalization of money and maintaining financial sector stability and security.

Consultations with stakeholders on digital currencies, including cryptocurrencies, stablecoins, and central bank digital currencies are being launched on Nov 3, 2022

With everything that is going on in the economy, it's safe to say nobody really knows what lies ahead in the next few months.



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