A "soft landing" has become significantly more challenging for North American economies, RBC says
More accelerated tightening cycles and higher terminal rates are a near certainty for both the Bank of Canada and the United States Federal Reserve, RBC Economics has predicted.
“Stronger-than-expected inflation continues to force central banks into aggressive action,” said Josh Nye, senior economist at RBC.
“The BoC and Fed in particular are now expected to make monetary policy ‘restrictive’ later this year. With a soft landing becoming more challenging, our base case assumes mild recessions in most of the economies we track.”
Crucially, these central banks no longer appear to have the luxury of hiking rates to more neutral levels before slowing down and assessing the impact of these hikes.
Instead, “we expect they’ll err on the side of more aggressive action, risking an economic downturn (now our base case for 2023) rather than decades of inflation targeting credibility,” Nye said. “Recession isn’t inevitable but it’s starting to look as if a lot has to go right for these economies to avoid giving back at least some of the gains made in what has been a historically rapid economic recovery.”
Read more: Bank of Canada rate hikes could cause recession, says economist
In its next policy announcement on July 13, the BoC is widely expected to follow the Fed’s lead of a 75-basis-point interest rate hike. The central bank stressed that such outsized moves are necessary to rein in runaway inflation levels, which are now at their highest in more than 30 years.
But any momentum that the Canadian economy has been enjoying since the beginning of 2022 will be difficult to sustain as the year draws to an end, Nye warned.
“With Canada’s economy operating beyond its longer-run capacity limits and unemployment at record lows, there’s little room on the supply side for above-trend growth to continue,” he said. “Rising inflation is chipping away at households’ purchasing power with real average hourly earnings now below pre-pandemic levels. And consumer confidence has fallen significantly since last summer, returning to late-2020 levels.
“We see these headwinds extending into 2023, and the impact of rising debt servicing costs on Canada’s highly indebted household sector will only continue to build next year. A softer global growth backdrop will also weigh on Canada’s economy.”
