Opinion: Canadians’ fears of recession could turn into a self-fulfilling prophecy

Canada‘s economy is about as hot as it could be right now.

Employment is nearly half a million workers higher than it was before the COVID-19 pandemic, and the unemployment rate has fallen to its lowest level in nearly 50 years. Real gross domestic product surpassed its pre-pandemic level about five months ago, and economists’ consensus forecast sees it rising by around 4% in 2022, roughly double the pace of economic growth before the crisis. .

Last week, the Bank of Canada said the economy is “heading into excess demand,” meaning the appetite to consume is so strong it exceeds the country’s capacity to produce.

So why do so many people suddenly have the recession on their minds?

Google data shows that web searches for the term “recession” have increased in Canada and the United States over the past week. Interest in the topic in Canada on the popular search engine is at its highest since the spring of 2020 – when the pandemic plunged the economy into a deep recession.

In nearly two decades of Google data, the only times searches for “recession” were more frequent than they are now were just before or during contractions in the Canadian economy (2008-2009, 2015 and 2020).

It should be noted that search rates in these cases were considerably higher than they are today. Nevertheless, this new resurgence of interest in the subject indicates, at the very least, that the general public has become unusually concerned about the risk of a recession, even in the midst of what is, in many ways, an economic boom. .

The main trigger appears to be rapidly rising interest rate expectations as central banks take the fight against inflation seriously. Those concerns came to a head last week, when the Bank of Canada took the unusual step of raising its policy rate by 50 basis points (0.5 percentage points), the first time in more than two decades that she made such a significant rate increase. . Normally, bank rate changes are limited to 25 basis points at a time.

The bank’s message was that rates will have to rise faster than previously thought – and, perhaps, higher – to bring inflation under control.

It’s a similar story in the United States, where the Federal Reserve raised its key rate in March and strongly signaled an acceleration in the pace of increases ahead – including, in all likelihood, its own 50 basis point hike. at its next meeting in early May.

For those familiar with economic history, this is a troubling prospect. The onset of Fed rate hike cycles has more often than not been a precursor to a recession. The trend is strongest in cycles in which the Fed raises rates quickly and aggressively to stop inflation.

Most consumers in the United States and Canada are probably unaware of this historic relationship. But they sense that central banks are preparing to put the brakes on the economy hard enough to quell raging inflation. And they have instinctive nervousness about the impact of sharp interest rate hikes on their finances.

“I think there’s a gnawed realization that after dramatic easing, central banks are going to end up tightening,” said veteran Canadian economist David Rosenberg, who warned of the risk of a central bank-induced recession for months. now. (Mr. Rosenberg was among the first prominent economists to see the global financial crisis and the Great Recession of 2008-2009 coming, when he was chief North American economist at Wall Street giant Merrill Lynch.)

In Canada, the overheating of the housing market and the large mortgage debt that accompanies it amplifies the risks associated with an aggressive tightening of rates. The Canadian economy has become highly exposed to the housing sector and consumer debt in recent years, and economists say this could make it hypersensitive to rate hikes.

On the other hand, the economy is entering this phase of rising rates with remarkable vigor. Employment is extraordinarily strong and wages are rising. The war in Ukraine, while both a human tragedy and a source of global economic risk, has sharply increased commodity prices, boosting revenues for Canada’s important resource sector. Households have collectively built up huge reserves of savings during the pandemic, providing pent-up fuel to support consumer demand.

“The economy can handle higher interest rates,” Bank of Canada Governor Tiff Macklem assured Canadians after the rate hike announcement last week.

But Google search data suggests Canadians are getting nervous. This in itself is a risk of recession.

If this worry translates into a serious erosion of consumer confidence, it could manifest itself in a decline in consumption, which could, in turn, derail business investment and hiring. That’s pretty much what an economic downturn looks like.

This is why consumer sentiment is such an important economic indicator – and Google’s numbers are, indeed, an early indicator of consumer sentiment. The more “recession” becomes part of the public conversation, the greater the danger of these fears turning into self-fulfilling prophecy.

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