2023 Financial Trends Revisited

Is Canada Still Headed for a Recession? 2023 Financial Trends Revisited

NerdWallet Canada reflects on its 2023 financial predictions. Here’s what we were right about — and what may unfold in the latter half of the year.

Last year, we pitched six financial trends poised to have a sizable impact on Canadians in 2023 — among them, the impending recession. We revisit that forecast to find out whether our predictions held water and to offer insight into what Canadians can expect for the rest of the year.

1. Expect an economic slowdown, but a recession isn’t guaranteed

Shannon Terrell: Canada’s economy grew at an annualized rate of 3.1% in the first three months of 2023, exceeding the 2.3% growth forecast by the Bank of Canada. This growth suggests Canada’s economic outlook is a favourable one — for now.

There’s a chance Canada may be able to eke out a few months of slower economic growth without actually dipping into true recession territory. Think of it like a forecasted hurricane being downgraded to a tropical storm. It’s still something to keep an eye on — but there’s no reason to board up your windows. At least, not yet.

How to handle it: Whether or not a bonafide recession is in the cards this year, I’d urge Canadians to steer clear of the complacency trap. Call it what you will, but economists agree we’re headed for a stretch of slowed economic activity, which could lead to job loss, stock market volatility, and more expensive goods and services. These financial snares are navigable under the right circumstances but may be particularly challenging without an emergency fund.

More than 1 in 5 Canadians (22%) say they do not currently have any money saved for emergency use, according to a survey conducted online by The Harris Poll on behalf of NerdWallet.

Be proactive and shore up your finances by building your emergency fund and prioritizing the repayment of variable- and high-interest debt.

2. Inflation and interest rates will come down — eventually

Clay Jarvis: Despite its rate hike on June 7, the Bank of Canada still expects inflation to be around 3% by the middle of 2023, the result of lower energy costs and the gradual shrinking of prices in general.

We’re almost at the mid-point of 2023, and the most recent inflation reading doesn’t exactly jibe with the Bank’s assumptions. Annual inflation actually increased slightly in April, inching up to 4.4% from a rate of 4.3% in March. Gas prices have fluctuated, but remain high, and the Russia-Ukraine war still threatens not only supply chains, but the actual supply of essential raw materials, as well.

I was hopeful that we might see a 25-basis point decrease in the overnight rate by the end of 2023, but it’s now looking as if the Bank’s June rate hike may not even be the last one this year. So much for an overnight rate of 4% or lower before 2023.

With interest rates rising again, a drop in inflation will be welcomed by consumers. Close to 2 in 5 Canadians (38%) say they have cut back on non-essential spending in the past 12 months, according to a survey conducted online by The Harris Poll on behalf of NerdWallet. Eighteen percent of Canadians withdrew from their savings or investments to pay for necessities in the past 12 months, according to the same survey.

How to handle it: Prices aren’t likely to recede to their pre-pandemic levels, which means at least some of the financial pressure we’re all feeling could be here to stay. So how do you deal with such a stressful situation?

First, keep things in perspective. You aren’t to blame for the effect inflation or high interest rates are having on your finances.

Second, think back on your borrowing and spending habits the last three to five years — what might you do differently in the future to be more ready for the unexpected?

Third, if you’re seriously concerned about your financial well-being, get help. If debt is the problem, call a credit counsellor or financial therapist; if you’re in need of financial assistance, explore what programs are provided by your provincial government.

3. Stock market volatility will continue to test investors’ patience

Shannon Terrell: Year to date, the S&P/TSX Composite Index — a benchmark index for Canadian investments — has had its ups and downs. But despite the volatility, the index continues to hold its value. In fact, the current pattern is quite similar to what we saw in 2022.

With a potential economic slowdown on the horizon, things may get worse for Canadian markets before they get better. But even if investors are in for a bumpy ride, some analysts remain optimistic that the Toronto Stock Exchange will rebound by year’s end.

How to handle it: Volatility, corrections and crashes happen. But Canadian markets have a strong history of rebounding from periods of low performance. Over 50 years of market data courtesy of RBC Asset Management demonstrates a consistent bear market rebound. Regardless of what awaits Canadian investors in the latter half of 2023, a diversified portfolio may help investors weather market volatility.

4. The Canadian housing market will stabilize

Clay Jarvis: A few months ago, with interest rates peaking and home sales plummeting, there were fears that the Canadian housing market was about to crash, burn and take the economy down with it. But as June rolls on, real estate agents are busy, prices are rising and the main concern as we head into the summer housing market isn’t a lack of demand, but a lack of housing supply.

In December, I said we’d see an increase in sales activity once interest rates started softening. Variable rates are as unapproachable as ever, but fixed rates decreased in March and remained approachable for several weeks after that. I don’t think it’s a coincidence that sales started picking up in April, and I expect June will be plenty busy — so long as there are homes to bid on.

The economic uncertainty that feeds and results from rate hikes can cause fixed-rates to increase, and that’s what we’re seeing now. That won’t be a concern for buyers who got pre-approved in April or May, but anyone getting into the mortgage market now will likely be dealing with decreased buying power and low supply.

How to handle it: Get pre-approved immediately.You’ll establish an upper limit for your home buying budget, which is especially important if you’re navigating a highly competitive summer market and might get sucked into an emotional bidding war. You can also secure a 120-day rate hold and prevent you from paying more for your mortgage if rates rise and you find a house in that period.

5. A new deal may spell fewer credit card fees for customers

Shannon Terrell: On May 18, 2023, the Government of Canada announced lower credit card processing fees for Canadian small businesses. Following an agreement with Visa and MasterCard, Canadian businesses that accept credit card payments may qualify for an interchange fee reduction of up to 27%. Business owners on the fence about introducing Canada’s new credit card fee to their customers may now hold off, perhaps indefinitely, in light of the government’s announcement of reduced processing fees for small businesses. The catch? The reduced rates don’t come into effect until the fall of 2024. This means Canadian businesses must continue to eat the full cost of accepting credit card payments — or pass the fee along to their customers — until then.

How to handle it: Processing fees for small businesses may be getting cheaper, but that doesn’t mean consumers are off the hook. Canadian companies can still pass credit card processing fees of up to 2.4% to their customers.

Any business that charges a fee for credit card transactions must disclose this practice to its customers in storefronts, websites, or at the point of sale. If you want to avoid paying a processing fee for using your credit card, opt for cash, debit or take your business elsewhere.

6. Crypto will remain on the fringes of the financial system

Clay Jarvis: Cryptocurrency was in a bad place at the end of 2022. The price of Bitcoin spent about three months south of $23,000, and one of the largest crypto exchanges, FTX, collapsed under the weight of its own mismanagement.

Things are looking better for crypto investors in 2023. Since January 1, Bitcoin is up around 60%, while Ether’s price has risen by around 50%. Those who bought the dip are doing alright.

But crypto as an industry remains plagued by the same problems it always has: unpredictability and a distaste for regulation amongst its biggest players:

A trio of recently collapsed U.S. financial institutions — Silvergate Capital, Silicon Valley Bank and Signature Bank — all had significant crypto exposure.
In May, Binance, the world’s largest crypto trading platform, announced it was leaving the Canadian market because of increased regulation. (The company is currently fending off accusations of evading U.S. law.)

The risk involved with crypto, at the personal, institutional and industry level, clearly isn’t decreasing; in fact, it can’t decrease until crypto is regulated like any other legitimate financial market. That’s not happening in 2023, which means another year on the fringes.

How to handle it: One of cryptocurrency’s few true knowables is that the bottom falls out of the market fairly regularly. With both Binance and Coinbase, two of the planet’s largest crypto exchanges, currently being sued by the U.S. Securities and Exchange Council, another cratering doesn’t feel far off. “Don’t invest anything you can’t afford to lose” feels like an adage custom-made for crypto investors; then again, it’s hard to predict the future of an asset class that has no inherent value.

Methodology

The survey was conducted online by The Harris Poll on behalf of NerdWallet from April 26-28, 2023 among 1,050 Canadian adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.89 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Mauricio Guitron at [email protected].

About the Authors

Clay Jarvis

Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the…

Shannon Terrell

Shannon Terrell is a lead writer and spokesperson for NerdWallet, where she writes about credit cards and personal finance. Previously, she was a writer, editor and video host for financial…