The Royal Bank of Canada (RBC) said today, Thursday, that in the coming year, Canada will be moving to a short-lived but moderate recession after the rise in interest rates to tackle inflation and labor shortages.  

In a report, RBC said that “This recession will be moderate and short-lived by historical standards and can be reversed once inflation settles enough for central banks to lower rates."

The report added that high inflation and labor shortages are creating an issue because they limit the purchasers’ capacity to pay for gasoline and groceries.

The global stresses on the supply chains caused in part by the conflict in Ukraine have led to pressures on the economy and have affected agricultural and energy prices, it said.  

According to the report, the Bank of Canada is forced to impose higher interest rates even if such a decision may mean contracting the economy; however, imposing higher rates now could avoid more “damaging” interest rate hikes, continuing with ten years of low inflation.    

The BRC said the recession is expected to be moderate and short-lived since global inflation may be peeking due to the Canadians spending less on goods and more on the services that were unavailable in the last two years as a result of the covid-19 pandemic measures.    

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“Prices are still rising too fast and inflation won’t slow sustainably until demand falls. But once that happens, central banks will ease interest rates again,” the report added.