Canada's economy set for recovery, Bank of Canada to cut rates by 2025: Deloitte

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Canada's economy set for recovery, Bank of Canada to cut rates by 2025: Deloitte

Canada's economic struggles are expected to ease starting next year, with a significant recovery anticipated in the second half of 2024, according to a new forecast by Deloitte Canada. The report, published on Thursday, September 28, 2023, predicts that the Bank of Canada may begin to cut its key lending rate by 2025.

The country's near-term economic slowdown is a result of the Bank of Canada's crackdown on high inflation, which has led to higher household debt and interest payments. The cooling of the economy has also been reflected in slowing consumer spending and softening labor markets. However, the anticipated easing of these pressures will likely spark a resurgence in growth among consumers and businesses by 2025.

"Canada’s economy has entered a rough patch and the growth is likely to be negligible,” said Dawn Desjardins, Chief Economist at Deloitte Canada, who co-authored the report. She added that "we do have an economy getting back on its feet in the first half of next year."

The report estimates that GDP will rise 1% this year and 0.9% next year. This is a positive revision from Deloitte's earlier prediction that GDP would contract by 0.9% in 2023.

Despite current challenges, factors such as a better-than-expected U.S. outlook and continued population growth in Canada are expected to offset some of the downward pressure from high household debt and stubbornly persistent inflation. Canada’s population is projected to jump 2.7% this year, a surge not seen since 1971 when it rose by 2.2%.

However, economists suggest that population growth would outpace job gains in the coming months, potentially driving up unemployment and slowing down consumer spending. The report suggests consumer spending this year will grow by 2% but slow to a pace of 1.2% in 2024.

In the housing sector, an increasing number of Canadian households are moving to refinance their property as they struggle with monthly mortgage payments — a trend expected to continue. Deloitte Canada estimates the overnight interest rate would fall to a neutral level of 3% by mid-2025, providing some relief for homeowners.

In the business sector, the report states that investment outlook remains muted in the near term due to cost pressures and economic uncertainties. Despite these challenges, the prospect of lower inflation and easing interest rates is anticipated to stimulate growth among businesses by 2025.

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