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S&P expects home prices to dip 9 per cent on a year-over-year basis by the first quarter of 2021.Darren Calabrese/The Canadian Press

S&P Global Ratings expects the Canadian economy to shrink further in 2020, and recover more slowly, than it forecast in April.

Satyam Panday’s forecast now calls for a contraction of 5.9 per cent in 2020, versus a prior prediction of a decline of 5.3 per cent. His forecast of a 5.4-per-cent increase in 2021 is scaled back from a previous 6 per cent. And he pushed back his estimate of when real GDP will regain its prepandemic level to the fourth quarter of 2021 from the third quarter of 2021.

The analyst also says a “house price correction is in the cards, despite lower mortgage rates.”

Mr. Panday says “before the pandemic, the country was already overdue for a house-price correction, and the pandemic’s hit basically created that last nudge for it. The combination of historic income and job loss, virus fear and uncertainty, new stricter Canada Mortgage and Housing Corp. lending rules, and an effective pause on immigration will strain demand for housing, despite historically low borrowing rates.”

He says S&P expects home prices, as measured by the MLS home price index, to dip 9 per cent on a year-over-year basis by the first quarter of 2021. He says S&P “views this as a temporary phenomenon, rather than a multiyear slump” such as seen in the U.S. housing crisis of 2007-2011. “But risks are tilted to the downside,” he said, with the chance that employment fails to recover.

Mr. Panday says gross domestic product will be 2.5 per cent smaller in 2023 than the size S&P forecast before the COVID pandemic.

The new estimates come just a week after competitor Fitch Ratings knocked Canada down a peg in its debt ratings. The S&P report is just an economic update, however, and is not a debt-ratings action. S&P still gives Canada its highest debt rating of triple-A.

Fitch downgraded Canada’s triple-A credit rating to double-A-plus on June 24 in light of much expanded 2020 government deficits. Finance Minister Bill Morneau responded to the Fitch report by saying Canada will continue to be fiscally responsible.

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