According to some economists, the Bank of Canada’s efforts to curb persistent inflation increase the chances of pushing the economy into a recession next year.
Consumers should start preparing for a contraction now, experts say, as the threat of layoffs and leaner days approaches the horizon.
Armine Yalnizyan, an economist and member of the Atkinson Institute, tells Global News that the odds of a recession “are approaching more than 50 percent in the next six to 12 months.”
Canadian economic output has shown mostly signs of growth so far this year. But Yalnizyan points to the contraction of the U.S. economy in the first quarter of 2022 and an increase in claims for unemployment benefits south of the border as signs that the economic cooling could reach the north sooner rather than later. .
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“I think it’s very difficult for Canada to avoid a recession when the United States has a quarter of a contraction,” he says.
1:36 Freeland isn’t sure if Canada will go into recession in years to come Freeland isn’t sure if Canada will go into recession in years to come – June 16, 2022
James Orlando, senior economist at TD Bank, agrees with Yalnizyan that there is “an incredible level of synchronization” among American neighbors.
He, like many big bank economists, believes the Bank of Canada will follow the example of the US Federal Reserve in raising interest rates by 75 basis points in its next announcement on July 13th.
With Statistics Canada reporting that the annual inflation rate soared to 7.7 per cent in May, the central bank will be pressured to act quickly and show Canadians that it will take the necessary steps to stifle inflation, says Orlando .
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TD Bank’s economic forecasts released last week show a significant slowdown in consumer spending in late 2022 and early next year.
TD believes the slowdown will narrowly prevent negative growth, but Orlando notes that the Bank of Canada will have a “very thin margin of error” as it will raise interest rates to avoid a recession: sweet spot economists call a “soft landing”. ”
“Indeed, it is reducing demand to such an extreme level, that inflation is expected to return and return to the target. It must ensure that it does not crush the economy as it goes through this process,” he says. .
Orlando notes, however, that recessions often follow cycles of rate hikes.
“They’re designed to curb demand,” he says.
What does a recession mean?
The onset of a recession is usually marked by two consecutive quarters of negative growth in a country’s gross domestic product.
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The housing sector, which has already shown signs of slowing and falling prices in some markets, is especially vulnerable to rising interest rates used to curb inflation.
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“Overall, this (rising inflation) increases the chances of a recession, when you raise interest rates to the point that housing is affected, where growth in general is affected,” Allan said earlier. Small, senior investment advisor at AI Private Wealth. week in an interview with The Canadian Press.
Observers say fears of a recession are already having an impact on the markets, and energy stocks on the TSX have had a hit once last week.
While Canadian oil and gas stocks have performed well for much of 2022 due to Russia’s invasion of Ukraine and the consequent disruption of global energy supply, Small said this week that some investors are beginning to worry that a broad-based recession, if it happens. – will give a bite to growing demand.
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“When you have a recession or a fear of recession, that basically slows it all down. So the demand side of the equation starts to decline,” he said. “You don’t have as much imbalance, you’re more balanced, if people don’t travel as much and don’t move as much.”
Read more: 1 in 4 homeowners says rising mortgage rates could push them to sell, according to the survey
In addition to harming consumer demand, the higher the interest rates, the more companies will be compressed. This could lead to layoffs, Yalnizyan says.
“The biggest problem for central banks raising rates is whether they make it more expensive for companies that have a large leverage to apply for loans. This will cool the pace at which they are hiring, and some companies that were over-leveraged may start firing people. And that’s the part that worries us, “he says.
“If this happens in large enough numbers to be problematic it’s the chapter that’s not written yet … but it’s not the direction you want to go because your best inflation coverage, as a home, is a good job “.
It’s time to “stop the hatches”
If Canada is heading for a recession, Orlando says the positive news is that recent years have been good for the average consumer.
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Employment growth has been plentiful, the average household has been able to save a bit during the pandemic and those lucky enough to enter the housing market have seen their wealth grow rapidly.
These factors could help isolate Canadians from rising interest rates and high inflation, Orlando notes.
“There’s a shock absorber, which is Canadian savings storage that is expected to be able to withstand some of those headwinds facing almost everyone,” he says.
Read more: Fears of recession are growing. This is how younger Canadians can prepare
But Sprott School of Business professor Ian Lee recently told Global News that the recession or not, now is the time to “beat the hatches” as the Canadian economy enters a period of “great uncertainty.”
Invoices such as mortgage payments and water bills will have to be prioritized in the coming months, as will groceries. Everything else should be discussed to reduce or eliminate completely, he says.
“That means reducing unnecessary spending, frivolous spending,” he says.
“Save that money for the rainy day and the storm we think is coming.”
– with archives by Anne Gaviola of Global News and The Canadian Press
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1:45 The economy can cope with further interest rate hikes, says Governor of the Bank of Canada The economy can handle more interest rate hikes, says Governor of the Bank of Canada – June 9 2022
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