RSM: Inflation to drop to 3% in Canada by end of 2023

Inflation in Canada is projected to fall to 3% by the end of 2023, according to RSM’s Q1 “The Real Economic Canada” report.

Though inflation surpassed 8% in June 2022, the central bank’s interest hikes are expected to do their work in cooling overheated demand (and the wider economy). RSM expects inflation to finally reach the standard 2% target by the end of 2024.

Interest rates increased by 0.25% in the past year to 4.25% in a bid to ease rampant inflation. RSM’s economists expect the Bank of Canada to raise rates to a peak of 4.75% by the middle of the year and to hold that rate to keep financial conditions tight.

Though the Canadian economy may avoid a recession (two consecutive quarters of negative growth), GDP growth is expected to slow in 2023 and 2024. RSM projects a decline from 3.25% growth in 2022 to just below 1% in 2023 and then a rise to 2% in 2024.

High oil prices will put a floor on the country’s GDP decline, but the inflation and interest rate hikes have dented Canada’s overvalued housing market – which has become a focal point for domestic and foreign investment as well as a key factor in extremely high rates of household debt.

Government policy finds itself in a precarious position where fighting inflation – a starker problem – requires hiking interest rates; this threatens the housing bubble, which requires cheap cost of capital, as well as limited housing starts, high immigration, and few restrictions on foreign ownership.

Confidence low 

After bottoming out in the pandemic, retail sales and consumer confidence surged when lockdowns lifted. Now, persistent high inflation has worn down consumer sentiment and slowed retail sales, according to RSM, which will drive weakened GDP growth this year and next year.

“We expect consumer confidence to wane and for retail sales to slow as long as inflation remains elevated. Because the consumer sector is behind much of the economy's output, we expect that to translate into lower GDP growth for Canada in both 2023 and 2024," said Joe Brusuelas, chief economist for RSM.