Deloitte Canada said in its economic outlook report that Canada appears ready to avoid a recession despite the persistent downward pressure caused by rising interest rates.

Deloitte added that a number of worrying trends continue to weigh on the economy, including persistent inflation, rising commercial insolvencies, and increasing mortgage delinquencies.

The company continued in its report: "Against this backdrop, we remain cautious about near-term prospects."

However, based on its current trajectory, Canada is likely to avoid a recession and even appears ready to begin recovering from its current recession in the second half of this year.

In an attempt to combat rampant inflation, the Bank of Canada raised the country's key interest rate from near zero in March 2022 to the current 5 percent through a series of hikes.

Inflation has since slowed significantly, and Deloitte says the central bank is preparing to start cutting interest rates in June. Most economists expect cuts to begin in June or July.

Deloitte said that despite these positive signs, the Canadian economy is likely to remain "stuck in neutral" in 2024, especially in the first half of the year, with real GDP growth of about one percent this year before reaching 2.9 percent in 2025.

Some assumptions supporting Deloitte's forecast include strong GDP growth in the United States, continued easing of inflationary pressures, Bank of Canada rate cuts, and a steady influx of newcomers to the country, supporting demand.

Statistics Canada reported on Thursday that Canadian GDP rose by 0.6 percent in January, with a preliminary estimate of 0.4 percent in February.

The report said that the economic recovery depends on interest rate cuts, which themselves depend on inflation continuing to moderate.

The report stated, "The good news is that measures aimed at cooling inflation have made significant progress," "however, factors keeping inflation high are unlikely to reverse in the near term."

Deloitte pointed out that the biggest headwind is housing costs, as Canadians continue to renew mortgages at higher rates. Renters also feel the rising cost of housing.

The report said, "Moreover, wage pressures remain much higher than inflation without any proportional increase in productivity, leading to higher unit labor costs for businesses and making it difficult to contain inflation."

Deloitte said the labor market remains remarkably resilient, although it expects employment gains to slow sharply in 2024.

Deloitte confirmed that household spending will remain modest in the first half of the year as consumers continue to face rising living costs.

The report also said: "Next year is expected to be much better with lower interest rates, economic recovery, and unleashing of pent-up demand."

Deloitte's report indicates that business investment is declining "at a worrying pace," and high interest rates are likely to limit the recovery in this area this year.

The report explained that high interest rates weaken the economy and undermine business confidence: "To overcome weak demand and tighter credit conditions, companies are increasingly delaying investment plans, focusing more on maintenance and repairs rather than expanding operations."

Unlike Canada, the U.S. economy remained much stronger under the weight of rate hikes, although its central bank is also expected to begin cutting rates in the second half of the year.

Deloitte said it expects U.S. economic strength to be moderate in the coming months but remain positive, with real growth of 2.4 percent in 2024 and 1.4 percent in 2025.

In a related context, the Bank of Canada confirmed that business and consumer sentiment improved during the first quarter, although high interest rates remain a burden on the economy.

The central bank issued its business outlook and consumer expectations surveys today, Monday, showing increasing optimism as people anticipate imminent rate cuts.

Although companies still report weak demand, indicators of working conditions, sales expectations, and hiring intentions have improved after several quarters of decline.

At the same time, nearly two-thirds of Canadian consumers are cutting back or postponing spending due to rising inflation rates and interest rates.

However, expectations of rate cuts make consumers less pessimistic about the economy's future, and thus fewer believe they will need to continue limiting their spending.

Workers also remain optimistic about the labor market and expect strong wage growth despite signs of a slowdown in the labor market.