Is The Bank Of Canada Leading Us Into A Soft Landing Or A Recession In 2023?

Is The Bank Of Canada Leading Us Into A Soft Landing Or A Recession In 2023?


We all lost a lot of confidence in the Bank of Canada after they didn’t keep their word about not hiking interest rates until into 2023. But since the first rate hike, we have actually seen a lot of bold moves coming from the Bank of Canada. 

Specifically, they’re aiming for a very narrow platform of a soft landing and their forward guidance in their latest monetary policy report still makes this look like the expected case. 

Now the big question remains, will we actually see this soft landing or are we in for something worse? We took a deep dive into all of the latest data, and we are actually pretty hopeful.


Recession vs. Soft Landing

First, let’s define what a recession is. Generally speaking, a recession happens when we see inflation come down but at the cost of significant decline in economic activity with at least 2 quarters of negative GDP. 

When that happens, we would also see unemployment rates rising, business closures, a decrease in consumer confidence and a lot of negative consequences that BoC wants to avoid.

So instead, the BoC aims to get to a narrow soft landing situation, where inflation will come down and even though the economy slows down in growth, it won’t get so bad that we’ll see major job losses and trigger a recession. 


Bank Of Canada’s Bold Moves

This goal was the reason behind the first 100 basis point jumbo rate hike back in July 2022, and this was a very bold from the BoC, since they were the first of the group of seven central banks to lead this movement.

We saw another bold move where they signaled a pause in rate hikes last month in January of 2023. The Fed certainly wasn’t confident enough to say this and Powell even touched on this during the Fed press conference on Feb 1, 2023.

We’re now seeing a lot more explicit forward guidance from the Bank of Canada and their projections are getting more concrete – the third bold move. 

And according to Andrew Kelvin, Chief Canada strategist with TD Securities, this is making the BoC more believable and here’s his quote: “I have to believe they have a higher-than-normal conviction with their forecasts moving forward, to be this comfortable giving such explicit forward guidance.”


Bank Of Canada’s Forward Guidance

So what are we seeing with the forward guidance? Let’s check out the first and most important thing, which is that disinflation is happening and BoC expects it to continue into the first half of 2023. In fact, if you compare the latest Jan 2023 report to last October’s report, things are getting better than projected.

We’re seeing a lot more certainty on the supply side with China reopening from COVID-19 restrictions, which then helps to moderate supply chain issues. Oil prices are coming down, commodity prices are coming down. Demand for good is slowing is slowing because of higher interest rates. And all of these factors are helping to slow down the price for goods and food. Even on the shelter side, although prices haven’t come down yet, it’s also projected to slow down in Q2.

Now, the toughest one to predict is inflation from services because they depend more so on the local labour market, which is still very tight. BoC’s hoping that with higher interest rates, household spending will slow down here soon, and when you combine this with higher productivity improvements, we should see wage growth slow down. The thing is, services tend to lag and so at this point, this is probably the biggest wildcard that might throw off inflation projections.

But if everything goes as planned, the BoC is telling us we will see a soft landing. With inflation forecasted to come down to 2.6% by year end this year 2023, and then back to 2% by year end 2023 plus very low GDP growth but not negative, this is the very narrow soft landing that we thought was unlikely – and it really hinges on where services inflation and really the tight labour market situation unfolds. 


Other Expert Views

Right now, we are pretty hopeful and it’s not just us:

  • The very pessimistic BMO has upped their chance of seeing a soft landing from 20-25% to 30%. 
  • TD also sees a higher chance of a soft landing. 
  • Globally, Goldman Sachs thinks it’s more likely now that China is reopening, we’re seeing falling inflation already and there’s a milder winter in Europe. 
  • The Fed is saying that it’s now definitely a possibility even though they previously said higher employment is needed. 
  • Even the White House is chiming in saying it’s likely even in the US.

Just be mindful that is the expected case now and the BoC makes it clear that we might see more rate hikes because things are still pretty unpredictable. But right now, the market is pricing in rates holding stable for the next while and then coming down.

Key Takeaway

Bringing all this back to real estate investments, if shelter and rents start stabilizing soon, energy prices come down more, then all of these things should give real estate buyers more confidence. 

We do expect Q2 to be a bit different because sellers who have been holding back will need to sell soon and the pent up demand since Q4 of last year also need to get flushed out. 

But after this, real estate prices should stay a lot more stable in the second half of 2023. Then once interest rates start to come down combined with more housing demand from population growth, we should see real estate prices resume a slower but steady upward trend in 2024.


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