Posthaste: Why Canada's economy may be in more trouble than the IMF thinks

Recession in Canada will be worse than in U.S., economists say

Good Morning!

The International Monetary Fund downgraded its forecasts for economic growth last week, but some think it didn’t go far enough.

Oxford Economics, for one, believes that the IMF is underestimating the impact that higher interest rates and the loss of wealth from falling asset and home prices will have on advanced economies.

“The IMF estimates that global growth in 2023 will be similar to 2019 – soft, but not a disaster – and that a global recession will likely be avoided. By contrast, our forecasts are much weaker and we think the global economy is on the cusp of recession,” wrote Oxford Economics director of global macro research Ben May in a note Thursday.

Oxford singles out Canada, the United States and most of Europe as most at risk of recession and “our relative pessimism is particularly pronounced for the U.S. and Canada,” said May.

Especially Canada. According to Oxford forecasts shown in the chart below, Canada’s economy is expected to sink even further into the red than those of the U.S. or U.K.

By contrast, the IMF expects Canada‘s GDP to grow 1.5 per cent in 2023.

Most economists agree that Canada’s Achilles heel is its housing market.

While Canada is unlikely to suffer the financial turmoil now engulfing the U.K., the important lesson of that scenario is “when interest rates are rising rapidly to levels not seen in a decade, things can break,” says Paul Ashworth, chief North America economist for Capital Economics.

“In Canada’s case, the biggest risk is still the one hiding in plain sight – the massive decade-long boom in house prices and the accompanying surge in household debt.”

The drop in home prices has so far been orderly, but Ashworth says there’s no guarantee it will stay that way.

“The big risks are still that adverse feedback loops develop either between housing and the real economy – as a recession pushes up the unemployment rate, triggering a rise in mortgage defaults – or between housing and the financial system – with lower house prices triggering losses at mortgage lenders, leading to tighter credit conditions,” he said.

Economists at Macquarie Capital Markets say headwinds for housing will gain strength in 2023 as the impact of higher variable-rate and fixed-rate mortgages reaches a peak.

Weakness in housing historically has led to recessions, and despite a sharp decline in the second quarter, residential investment in Canada still commands a high percentage of GDP at 8.7 per cent, they said.

“Our expectation is that Canada will suffer a more severe recession than the U.S. in 2023 with the unemployment rate rising ˜5 ppts and real GDP contracting by 3%,” wrote economists David Doyle and Neil Shankar.

Still, these are uncharted waters for economists and policy makers, as Oxford, whose forecast is not only lower than the IMF’s but also consensus, acknowledges.

“While there is a general agreement on the nature of the shocks that are hitting economies, there is considerable uncertainty over the extent to which economic growth will slow in response,” wrote May.

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TROUBLE IN CONDO LAND Nervous investors looking to offload their pre-construction condos in the secondary market may find themselves out of luck, the Financial Post’s Stephanie Hughes TROUBLE IN CONDO LAND . Real estate agents in the Greater Toronto Area have been seeing a surge of calls from pre-construction buyers who now want to sell their purchase agreements on, but stagnating condo prices are making it more difficult for them to exit their investments. One industry outsider said he has never seen the market so soft. Trouble in the pre-construction condo market could have wider consequences for the economy. Read on to find out how. Photo by Frank Gunn/The Canadian Press

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    • Bank of Canada releases Business Outlook Survey and Survey of Consumer Expectations
    • Carolyn Rogers, senior deputy governor of the Bank of Canada, will participate in a panel discussion at the Toronto Centre’s 25th Anniversary Event. The panel topic will be about challenges and opportunities for the financial system
    • Francois-Philippe Champagne, minister of innovation, science and industry, will make an announcement about supporting innovative solutions to advance research and development and 5G networking in Canada
    • George Smitherman, CEO of Cannabis Council of Canada; and several cannabis sector CEOs will hold a press conference to discuss action needed in the cannabis industry on the 4th anniversary since legalization in Canada
    • Nokia CEO Pekka Lundmark in Ottawa for announcement alongside Innovation, Science and Industry Minister François-Philippe Champagne and Ontario Premier Doug Ford
    • Three-day Toronto Global Forum begins with speakers Banque de France Governor François Villeroy de Galhau and Irving Oil president Ian Whitcomb
    • Steve Clark, Ontario minister of municipal affairs and housing, will make an announcement in Thunder Bay
    • Former CannTrust Holdings Inc. leaders court hearing
    • The standing committee on foreign affairs and international development meet to discuss the export of Russian Gazprom turbines
    • The standing committee on finance meets about Bill C-228, An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act
    • The standing committee on transport, infrastructure and communities meets about anticipated labour shortages in the Canadians transportation sector
    • The standing committee on agriculture and agri-food meet regarding Bill C-234, An Act to amend the Greenhouse Gas Pollution Pricing Act
    • Today’s Data: Canada building construction data for August
    • Earnings: Bank of America, Charles Schwab

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    • TROUBLE IN CONDO LAND
    • Canada will fast-track energy and mining projects important to allies: Freeland
    • It’s time for investors to stop complaining and spending so much, save some money and put it to work
    • Howard Levitt: A falsified resumé can come back to haunt you years later
    • Fast food faces challenge to stay affordable

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    Homes sales in Canada were quiet in September — “very, very quiet,” according to one economist. BMO senior economist Robert Kavcic said there were only two Septembers when sales were slower — the 2010 recession and shortly after in 2012. Of the 26 cities tracked by the Canadian Real Estate Association only Regina saw sales rise. The deepest declines were in southern Ontario and around Vancouver.

    A standoff in the market is one reason for the stalling sales, Kavcic said. Higher borrowing rates means more buyers can’t qualify for or afford mortgages and they “probably don’t want to catch falling knives anyway,” he said. Sellers, on the other hand, are able to hold out for better market conditions, or if they are investors, rent their units out.

    “In other words, the market is just not clearing right now — hence the lack of transaction volumes,” Kavcic wrote in a note after the data came out Friday.

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    A 2021 CPA Canada Fraud survey suggests that one in three Canadians had fallen victim to a scam at one point.

    The more anonymous nature of online shopping makes it an ideal place for fraudsters to scam people out of their cash and goods. But that doesn’t mean you shouldn’t offload your old air conditioner on Kijiji, or score an air fryer on Facebook Marketplace, writes MoneyWise’s Barry Choi. Our content partner has these tips on how to avoid being a fraud victim on online platforms such as Facebook Marketplace, Kijiji, and Craigslist.

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    Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

    Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.