The state of the Canadian economy and whether a recession is a “necessary evil”
Like a convertible rolling down the highway, what was a scorching economy shows signs of tapping on breaks.
As pandemic restrictions have been lifted over the past 12 months, all of the pent-up demand for shopping, travel and overall spending has started to spill over, with inflation hitting record highs.
Now, with each passing day, there is more and more talk about the need for economic cooling, which is why a looming recession could be imminent.
Finance Minister Chrystia Freeland is already warning of ‘tough days’ for the economy, while some finance experts suspect there is a 70% chance of a recession and it could happen in the beginning of 2023.
All of this speculation about a recession brings up painful memories of what many felt in the 1980s and again during the financial crisis some 15 years ago. These were deep recessions with ripple effects across the country and in businesses large and small.
A recession this time around isn’t meant to be that bad, rather a reset or pause in growth to curb runaway inflation, supply chain issues and labor shortages.
No one wants a recession, but experts say it may be the remedy needed to get back to what people normally expect when looking for a job, buying a home or planning their monthly household budget. .
There are many ways to judge the health of the economy and its direction, so here’s a look at some of the key indicators and what they show.
The economy is at a standstill
At this point, the country’s economy is probably no longer growing, but not shrinking either. Instead, it’s at an inflection point. A potential calm before the storm clouds arrive.
Unfortunately, the most recent data is from July, so it’s a bit dated. The economy grew slightly that month, but continued its trend of minimal growth after strong momentum in the first half of the year.
Many people are starting to cut their expenses. Retail spending is up, but that’s probably because of inflation. Basically, people don’t buy more, they just have to pay more for what they buy.
The latest retail sales figures are for August, which show an increase. Still, economists say retail sales have likely peaked and they see signs that consumers are starting to cut back on spending amid escalating inflation and borrowing costs.
“I watch retail sales a lot,” said Charles St-Arnaud, chief economist at Alberta Central, which represents credit unions in the province.
“If we go into a recession, it will come from the consumer side,” he said.
The business community is pessimistic
Take a look at how stock markets have fared this year and you’ll quickly know what investors and the business community think of the economy.
Stock markets are reacting to all the economic gloom and investors are expecting more pain to come.
The TSX has lost more than 12% since the start of the year, while major US stock markets have lost even more value.
According to a recent Bank of Canada survey, overall business sentiment has softened, with many companies expecting slower sales growth and a majority saying a recession is likely over the next of the next 12 months. Manufacturing activity is also falling.
Amazon founder Jeff Bezos said it was time to ‘batten down the hatches’, while Goldman Sachs CEO David Solomon said there was ‘more volatility on the horizon’ and a likely recession.
Ask for help
As a trucking and logistics company, the Mullen Group, headquartered in Okotoks, Alberta, is enjoying one of its best years since its inception in 1949. The fortunes of the company are changing with the ‘economy.
While companies have struggled to find enough workers this year, many have caught up, including the Mullen Group, which is now fully staffed, including enough lorry drivers. There is no need to hire more people as the company is starting to experience a bit less demand for its services, especially from the retail sector.
“We’re seeing cracks, we’re seeing some slowdown, we’re seeing consumers being a little more cautious right now with their spending,” chief executive Murray Mullen said.
“Recessions are a time to pause and restore balance,” he said. “Sometimes it’s a necessary evil.”
Canada added 21,000 jobs last month, bringing the unemployment rate down to 5.2%.
“We are literally in the tightest labor market we have seen in decades and at the same time prices [are] really high. So you really don’t want to have what we call a wage inflation spiral,” said George Jia, associate professor of economics at the University of Prince Edward Island.
Unstable housing market
As mortgage rates have climbed this year, home prices have fallen in many parts of the country.
In fact, average sales and prices have fallen.
Average selling prices are down more than 20% from February’s record high and down 6.6% from last year. The number of sales is down more than 30% compared to a year ago.
“Canada’s economy has been partly driven by the boom in the housing market for some time now,” said Jia, who advises people to pay attention to the overall health of the industry, beyond the real estate figures.
After a surge in construction in 2021, housing starts fell by around 5% in the six largest cities in the first half of this year.
Like the stock market, the state of the housing market can often indicate the direction the economy is heading.
It seems like every month people are in even more of a rush. As the cost of living has increased, including grocery prices and mortgages, some people are unable to pay their bills.
The number of insolvencies remains quite low, but it is increasing and there are other signs of lingering problems.
In recent months, there has been a sharp increase in the number of consumer proposals — renegotiation with creditors to repay debts — which suggests an increase in the number of households struggling with debt management.
It’s no secret that many people take a financial hit to their wallets, primarily due to inflation and rising borrowing costs. Given the high levels of household debt in the country, some experts predict that bankruptcy rates will continue to rise.
For St-Arnaud, with Alberta Central, the question is whether the strength of the labor market and the huge amount of savings accumulated during the pandemic, which he estimates at $320 billion, will provide some relief from the challenges financial issues that many face.
“We are already starting to see households reduce their level of savings to maintain their level of spending,” he said. “If there is a big increase in the unemployment rate, then more households will have more problems.”