The Canadian economy started the year with a remarkable recovery from the COVID-19 pandemic, but as 2023 approaches, high interest rates are expected to lead to significant losses. Randall Bartlett, Chief Canadian Economist at Desjardins, said: "2022 was full of vitality."

After a deep decline during the pandemic, the economy rebounded this year with strong growth and record low unemployment rates. The housing market also thrived thanks to low interest rates that stimulated buying activity.

However, this abundance in the economy, along with global pressures, led to the most pressing economic issue of this year: the highest inflation in decades.

In response, the Bank of Canada quickly reacted to rising prices with one of the fastest monetary policy tightening cycles in its history, paving the way for the upcoming year.

Since March, the central bank has raised the key interest rate seven consecutive times, increasing it from 0.25 percent to 4.25 percent. This is the highest level since January 2008.

Canadians and businesses facing higher borrowing costs are also expected to reduce spending significantly in the new year. Economists expect this process to slow inflation, although the speed is unknown.

Inflation peaked at 8.1 percent in June and has been declining since then. Last month, the annual inflation rate fell to 6.8 percent, showing slight but positive progress.

In the Bank of Canada's October monetary policy report, it forecast that the Canadian economy will stall at the end of the year and even into the first half of 2023. This aligns with the expectations of many forecasters, although some predict a recession in the new year.

There were also some early signs that the imminent economic slowdown has already begun, with a decline in consumer spending in the third quarter.

As the economy shifts, working groups were particularly concerned about the impact of rising interest rates on employment. However, many economists are optimistic that unemployment will not rise significantly due to the current tightness in the labor market.

In November, the unemployment rate neared its record low at 5.1 percent.

One factor that will affect the depth of the economic contraction is whether the Bank of Canada continues to raise interest rates. After its recent decision on the interest rate in early December, the central bank indicated its readiness to pause the strong interest rate hiking cycle.

However, forecasters are divided on whether the Bank of Canada is actually ready to stop raising interest rates.