With inflation on the rise and central banks poised to raise rates to combat it, there’s one important question Canadians are asking about the state of our economy: Will there be a recession, and what will it look like?
A recession is defined as two financial quarters of declining economic activity.
RBC predicts that the Canadian economy is on track for a “mild recession” in 2023, with variables such as real estate, jobless claims and delayed economic ramifications of pandemic restrictions leading to GDP growth of less than 1 per cent.
WHAT IS A ‘MILD RECESSION’?
“There are various shades of recession, from gray to deep black,” Sal Guatieri, senior economist and head of BMO Capital Markets, told CTVNews.ca in a phone interview Monday.
“Our view is that we’ll come out pretty lightly. We expect the economy to contract for a quarter next year and maybe stall by the end of this year. This would be called a growth slump.”
A “growth recession,” Guatieri explained, is a term applied when the economy is so weak that the unemployment rate rises about 1 percent in a couple of years.
“The economy, for the most part, would continue to expand, but not enough to provide jobs for all the new people entering the workforce,” he said.
When it comes to staffing shortages that contribute to inflation, companies are required to pay more not only to attract new workers, but also to retain current staff, Guateri told CTVNews.ca in an interview in July.
This, in turn, can add to the chain reaction of rising costs, he explained. But if companies can no longer afford to pay workers, there will be fewer jobs available. Rising costs and less work exacerbate the problem.
Guiatieri acknowledges that other forecasters are predicting a more substantial recession.
“It all comes down to depth. How deep is the decline in GDP? If it’s just a percent or so, I’d say it’s pretty slight. And it also comes down to duration. Is it just a couple of quarters?” or does it spread? over several quarters? If it’s just a couple that would fall into the moderate camp. If it’s more, then of course it could go into a more standard recession.”
On average, he said, recessions tend to mean GDP shrinks about 3 percent, the unemployment rate rises about 3 percent or more, “and that happens over several quarters.”
Finally, he explained, there is the “Great Recession.”
“This is what it was in 2008, when the economy is contracting quite significantly: four or five percent for many quarters. And when the unemployment rate is rising by much more than three percentage points.”
According to RBC’s special housing report, as rising interest rates cause a domino effect on the Canadian economy, factors such as real estate, with an estimated 12 percent decline in house prices next year , can lead to a decrease in wealth and, therefore, a decrease in economic activity.
On its site, RBC says, this recession would be “short-lived by historical standards, and may be reversed once inflation stabilizes enough for central banks to cut rates.”
If inflation falls rapidly, the Canadian economy could be headed for what is called a “soft landing.”
What is a ‘soft landing’?
Investopedia, a financial education website, defines a “soft landing” as “a cyclical slowdown in economic growth that avoids recession.” The term is attributed to the goal of central banks seeking to raise interest rates enough to prevent an economy from overheating with high inflation.
“Soft landing can also refer to a gradual and relatively painless slowdown in a particular industry or economic sector,” explains Investopedia.
Economists believe a soft landing is not out of the realm of possibility as post-pandemic demands continue to drive recovery in some sectors, RBC says in a report.
“Canadians continue to drive a recovery in the travel and hospitality sectors. And higher global commodity prices have boosted the mining sector. But companies are struggling to find the workers they need to expand production.”
So as Canadians continue to feel the economic hit at gas stations and grocery stores, the recession may be “moderate,” but the economic reality — with staff shortages, higher costs and less wealth — won’t be felt as badly. small.
There is a word for this. It’s called a “vibecession.”
WHAT IS A ‘VIBECESSION’?
The term was coined by Kyla Scanlon, writer and influencer, and is attributed to the public interpretation of economic realities.
Scanlon argues that “how you feel adds up to how everyone else feels,” he said, arguing that consumer confidence is an important component of GDP growth.
“We take in experience and evidence, shape expectations, which distorts perception and acts as a forcing function for interpretation,” he wrote on his site.
“So when people feel down (which is what they’re doing right now), they might pull back on some aspects of spending, which we’ve seen. Inflation is the bogeyman in the room.”
WealthSimple, which broke down the concept of “vibecession” in a newsletter, sees the concept as the inverse of a soft landing.
In the context of the Canadian economy, with high mortgage payments and sky-high grocery bills, a “vibecession” would ultimately involve inflation falling enough to prevent central banks from raising interest rates, but keeping the sentiment of sour consumers across the country, explained WealthSimple.
In the telephone interview, Guiatieri noted that “there are other [economists] that forecast an actual recession: a two-quarter decline in GDP or a broader decline in economic activity.
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