Are we headed for a recession? These are the signs to watch out for

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As we head into 2023, many economists have said that Canada should prepare for at least a mild recession amid high inflation and aggressive rate hikes by the Bank of Canada.

RBC economists forecast in October that Canada could enter a “moderate” recession in the first quarter of 2023. Similarly, in the fall economic statement, the federal government laid out a “downside case” that would see a ” mild recession” in the first quarter.

These are some of the indicators that can offer an idea of ​​whether Canada could go into recession and what an economic downturn would look like if it does.


Economists say that inflation data is one of the key metrics that will determine if Canada enters a recession. Higher inflation rates would force the Bank of Canada to make further interest rate increases in order to slow down the economy.

“Demand is outpacing the supply available from the consumer, and that’s driving up inflation. So the Bank of Canada has made it pretty clear that the economy needs to slow down to get inflation under control,” Nathan Janzen, RBC senior economist . Economy, he told by phone.

Data from Statistics Canada has shown year-on-year inflation has been declining each month after peaking at 8.1% in June.

However, much of this decline can be attributed to falling fuel prices, and the Bank of Canada has signaled that it is not done with rate hikes.

The food inflation rate was 11.4 percent in September, the highest since 1981. Meanwhile, core inflation, which excludes food and energy, has continued to hover around 5.3 percent and 5.5 percent. cent since June.


Two negative quarters of GDP growth has been a working definition of a technical recession often used in the media, but economists say it’s unclear how to define a real recession.

“There is no mechanical definition of a recession. A recession is a ‘significant’ decline in economic activity that spans the entire economy and lasts longer than a few months,” the University economics professor told from Calgary, Trevor Tombe. “That’s something where lawsuits are involved.”

Determining whether our economy is in a recession rests with the CD Howe Institute’s Business Cycle Council, which involves a group of economists who meet each year, or when a recession is likely to start or end. Similarly, in the US, recessions are determined by the Business Cycle Dating Committee of the National Bureau of Economic Research.

But GDP doesn’t tell the whole story. Last summer, the US posted two straight quarters of economic growth, but Treasury Secretary Janet Yellen insisted the country was not in recession, given the strong jobs numbers. The Business Cycle Dating Committee also made no recession statement at the time.

The severity of a recession may also depend on how steep the drop in GDP is.

“Of course, it can go down by 0.1 percent or it can go down by one or two percent. So a recession can be very mild or it can be very deep,” said Peter Dungan, a professor of economics at the Rotman School of the University of Toronto. of Business, told

Even if Canada’s GDP doesn’t decline, slower growth can still spell bad news for the economy.

“The magic number is not zero,” Dungan added. “In a country like Canada, we would expect, year after year, growth of two percent. So if you have one percent growth, that’s what people sometimes call a ‘growth recession.’ And it’s likely to be one where the unemployment rate starts to rise.”


High levels of unemployment are typical features of a recession. Yet Canada’s job market has been red hot for the past year, with more job openings than workers available to fill them.

As of October 2022, Canada’s unemployment rate was 5.2% according to Statistics Canada, slightly above the record low of 4.9% in July and August.

But in the event of an economic downturn, experts say vacant jobs would be the first to disappear before unemployment begins to rise.

“Those will be the ones that start to disappear first instead of people losing their jobs, which is great, because that means the unemployment rate doesn’t have to go up as much,” Dungan said.

BMO said in a report released Nov. 7 that it expects unemployment in Canada to hit 6.5 percent next year as a result of a “shallow recession.” RBC expects Canada’s unemployment rate to rise by 1.7 percentage points in 2023 to nearly seven percent and says low-income Canadians will be hit hardest.

“That’s a significant increase. It will cause difficulties for some households, but historically it would be on the mild end of recessions,” Janzen said, noting that these projected unemployment levels are still much lower than levels seen over the past year. 2008. financial crisis.


Uncertainty caused by Russia’s invasion of the Ukraine sent oil prices soaring, with gasoline prices in some Canadian communities peaking at more than $2 a liter last summer.

But high oil prices have generally been good news for the Canadian economy, since Canada is the fourth largest oil exporter.

“High oil prices are normally positive for the Canadian economy as a whole. I still think all the evidence suggests they are, but not all provinces,” Tombe said.

In 2015, Canada experienced a slight slowdown after oil prices plummeted, resulting in the cancellation of several investment projects in the tar sands.

But Dungan believes lower oil prices now mean more good news than bad, given the relative lack of tar sands investments at risk of write-off and the impact oil prices have on inflation.

“What a lower oil price will do around the world, both in Canada and around the world, is alleviate inflation. This means that central banks don’t have to raise their interest rates as much, which means that ease that direction of going into a recession,” he said.


After the Bank of Canada began raising interest rates, house prices in much of Canada experienced sharp declines from their highs. According to the Canadian Mortgage and Housing Corporation, median home prices had fallen 15.6 percent across Canada from February to August.

This has translated into a large loss of wealth for Canadian households. An RBC report released in late October said $900 billion had been lost as a result of this housing market correction and expects losses in net wealth to peak at $1.6 trillion.

As a result, RBC expects declining wealth to reduce consumer spending, which could decline by $15 billion by 2023.

“We’ve already seen (weakening) in the housing market, but the next sector to see some softening could be manufacturing. We’ve already seen a pretty big slowdown in physical merchandise consumption, particularly in the United States, from levels really high early in the pandemic,” Janzen said.

Consumer spending is also likely to take a hit thanks to inflation. The Bank of Canada’s consumer expectations survey in October found that consumer confidence was waning and many Canadians plan to cut spending to cope with high inflation. For this year’s holiday season, Deloitte Canada said it expects spending to fall 17 percent.

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