Canada has been able to ward off a recession thus far, but our luck and good fortune won’t hold up much longer
Many Western democracies, including Canada, have been understandably concerned about global economic conditions over the past few years. Massive COVID-19 spending by most governments, combined with factors such as high inflation, soaring housing prices and mortgage rates and escalating costs for food and clothing, have pushed many individuals and families to the brink of financial insecurity – and, in some cases, ruin.
This has led to increased concerns about the looming possibility of a global economic recession.
The National Bureau of Economic Research (NBER) defined a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP [Gross Domestic Product], real income, employment, industrial production, and wholesale-retail sales.” There’s also a basic rule of thumb that two consecutive quarters of negative GDP growth means a country is in recession, although there are other economic factors and measures to be considered.
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Is the world about to spiral in this direction? It appears so, and Canada will undoubtedly be part of this awful ride.
RBC economists Nathan Janzen and Claire Fan, who had predicted last July that Canada was heading for a recession, updated their forecast within a few months.
“Cracks are forming in Canada’s economy,” they wrote in the Oct. 12, 2022, edition of Proof Point. “Housing markets have cooled sharply. Central banks are in the midst of one of the most aggressive rate-hiking cycles in history. And while labour markets remain strong, employment is down by 92,000 over the last four months.” They also noted that the Bank of Canada was expected at that time “to lift the overnight rate to four percent,” and the U.S. Federal Reserve would “likely hike to between 4.5 percent and 4.75 percent by early 2023.”
In Janzen and Fan’s analysis, “these factors will hasten the arrival of a recession in Canada – which we now expect to start in the first quarter of 2023.” Fortunately, our country has been able to stave off the dreaded “R” word to date.
The Bank of Canada’s target for the overnight rate reached five percent this summer, with the bank rate and deposit rate matching the same percentage. These figures could have easily triggered a recession, but they didn’t. “Global inflation is easing, with lower energy prices and a decline in goods price inflation,” according to a July 12 media release, and “economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been surprisingly resilient.”
At the same time, serious economic concerns remain.
“Robust demand and tight labour markets are causing persistent inflationary pressures in services,” the Bank mentioned. Meanwhile, “China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector” while growth in the euro area “is effectively stalled: while the service sector continues to grow, manufacturing is contracting.” In other words, “global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation.”
The Bank also noted that “Canada’s economy has been stronger than expected, with more momentum in demand” and strong consumption growth in the first quarter. That’s true, but it also expected consumer spending “to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy.” The threat of higher interest rates means “the Bank expects economic growth to slow, averaging around one percent through the second half of this year and the first half of next year.”
Long story short, Canada has been able to ward off a recession thus far. If domestic and international economic conditions continue to either slow down or worsen along the lines of what the Bank suggested, our luck and good fortune won’t hold up much longer.
There are already some early warning signs of this.
Reuters’s Ismail Shakil and Steve Scherer wrote on Sept. 1 that “Canada’s economy unexpectedly contracted in the second quarter at an annualized rate of 0.2 percent and growth was most likely flat in July … a result that will probably allow the central bank to hold rates amid a possible recession.” Their colleague, Fergal Smith, wrote on the same day that “the Canadian dollar on Friday weakened by the most in one month against its U.S. counterpart,” a decline of six percent, “as investors slashed bets on another Bank of Canada interest rate hike.”
If the third and fourth quarters of 2023 follow a similar pattern, Canada will likely be in a small (or modest) recession. This won’t immediately cripple our economy, but many individuals, families, businesses and communities will be directly affected.
The vast majority of Canadians will be desperately looking for answers. Alas, they’ll have to face an unfortunate political reality. The fiscally irresponsible federal Liberal government barely understands the questions, and Prime Minister Justin Trudeau won’t be Canada’s economic saviour.
Michael Taube, a Troy Media syndicated columnist and Washington Times contributor, was a speechwriter for former Prime Minister Stephen Harper. He holds a master’s degree in comparative politics from the London School of Economics.
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