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What’s ahead for the Canadian economy in 2023?

What are the potential impacts and risks of a potential U.S. recession to the Canadian economy and currency? How will high inflation and continuing U.S. Fed rate increases affect Canada in the year ahead? In this short video, Vanguard discusses what’s ahead for the Canadian economy in 2023.

The Canadian economy clearly, because of a high beta to the U.S. economy, is very closely connected from a trade perspective and usually we will see, if we see a slowdown in the U.S., we will see repercussions there too. In fact, our expectation for growth in Canada for 2023 is 0.7%, well below the trend, right.

But I will say there are a couple of other drivers of growth that are more idiosyncratic of the Canadian economy. One is the amount of leverage in the housing market there. That’s something very specific and different to other developed markets, so with higher interest rates, that may affect the housing market and consumers differentially more than in the U.S. and other markets, right. 

And the second important driver for the Canadian economy is commodity prices. If we are heading into this global recession, right, and not just U.S., we expect both energy prices and food and other commodity prices perhaps slowing down and that will be a second factor impairing the economy there.

Finally, again, the central bank, the Bank of Canada, not much option, similar to the Fed, as they continue fighting against inflation. They're likely succeeding in terms of inflation heading in the right direction, but they cannot let up, right. They just have to continue, and in that sense, they won't be able to provide too much support early on, right. So that's why we foresee a little bit of a slowdown in the Canadian economy 

The Canadian dollar

Certainly, the Bank of Canada will keep moving in lockstep with the Fed. They have been doing it since very early on as they have their own inflation trends to fight. 

And, of course, that has some impacts on the currency certainly. We have seen the loonie do pretty well actually during the year because the Bank of Canada was also very preemptive and moved very close to the Fed.

I will say, also, the other thing that helped the Canadian dollar was the strong trade balance. The trade balance moved from deficit to surplus thanks to the high commodity prices that we saw. We don't expect that to repeat in 2023, but certainly the loonie is coming from a place of strength and with the central bank supporting that even if at the expense of a little bit of a slowdown. 


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