Inflation will likely drop to three per cent by the end of 2023, new report finds

TORONTO,  ON - (Feb. 22, 2023) - RSM Canada ("RSM"), a leading global provider of audit, tax and consulting services focused on middle market businesses, today launched its first 2023 edition of ‘The Real Economy Canada’ – a quarterly report that provides Canadian businesses with analysis and insights on the country’s complex economic conditions.

With price instability and a tight labour market spilling over into 2023, the first edition of this year’s ‘The Real Economy, Canada’ report examines what inflation will look like in 2023 as Canadian businesses and consumers continue to navigate a volatile economy.

The report also shines a light on how Canada’s middle market businesses are faring in their ongoing battle for employee retention amidst a white-hot labour market and how the downtown cores of Canada’s biggest cities are attempting to fill the void left by businesses that are pivoting to remote work.

Key findings in this quarter’s report include:

Inflation in Canada could potentially be cut in half by the end of 2023.

• Inflation will likely hover around 7 per cent in the final quarter of 2023 before falling to around 3 per cent by the end of the year. This will be followed by a return to the 2 per cent target by the end of 2024.
  
• Interest-rate-sensitive parts of the economy, like housing and big-ticket consumer purchases, are starting to see the impact of the increased cost of credit, though the effects of higher rates will take more time to register.
• Waning consumer confidence and slowing retail sales, induced by persistent inflation, will translate into lower GDP growth in 2023 and 2024.

Canada may avoid an economic recession, though expect economic growth to slow in 2023 and 202

• GDP is projected to decline from about 3.25 per cent growth in 2022 to just under 1 per cent in 2023 before rising to 2 per cent in 2024
• Oil prices have put a floor under the economy’s decline, though combined interest rate and inflation shocks have put a dent in housing, an increasingly important sector to the economy.
• Increased supply of labour will be a crucial component in achieving higher economic output, hence the federal government’s growing immigration targets.
• Commodity prices have coincided with real GDP growth in Canada for over a decade, which can be attributed to the value of the Canadian dollar becoming dependent on commodity pricing.

Interest rates are unlikely to decline for the foreseeable future.

• Bank of Canada expected to continue raising interest rates to cool persistent inflation and surging demand, which has been spurred by a hot labour market.
• Bank of Canada will likely raise its policy rate to a peak of 4.75 per cent by the middle of 2023 before holding rates in place to keep financial conditions tight.
• Despite some positive signs, growing headwinds are hurting the Canadian economy to the point where the rising risk of a recession and a larger-than-expected housing contraction cannot be dismissed.

A hot labour market is driving a renewed emphasis on employee retention.

• RSM study of Canadian employees at medium-to-large sized organizations found that over 75 per cent are proud of where they work, though over 14 per cent are actively looking for new job opportunities.​
  
• A flexible work environment remains a key draw for talent, with over 60 per cent of employees stating they would like more flexibility to set their own hours and schedule.​
• Canadian employees stated that work-life balance, support from superiors- and the potential for advancement are the most critical elements for an ideal job.

“With inflation still elevated and demand surging in Canada, we expect the Bank of Canada to continue raising interest rates to cool an overheating economy,” says Joe Brusuelas, chief economist for RSM. “As a result, we can expect inflation to fall to around three per cent by the end of 2023 and return to the two per cent target by the end of 2024."

Brusuelas continues: “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.”

For more information on RSM Canada's ‘The Real Economy, Canada’, or to download the report, please visit their webpage.