Introduction
Headlines, social media posts, and conversations about a recession in our future are everywhere. Big banks, economists, and even the former head of the Bank of Canada are predicting one (Zimonjic, 2022). Recessions mean uncertainty, and in the current period of speculation about whether or not a recession will take place, this uncertainty is even worse. Here are the essential facts that you need to know to be prepared for whatever economic situation Canada may face.
What is a recession? Are we in one?
Well, that depends on who you ask. The term “recession” has many definitions used by different economists. Generally, a recession is simply a prolonged period of substantial economic downturn. The most common definition of a recession is a “technical recession”, which occurs when a country’s Gross Domestic Product, or GDP, declines for two consecutive quarters (Reserve Bank of Australia, 2022).
When this occurs though, not everyone considers it to be a recession. Many other factors such as employment, production, and trade are considered before different groups and countries are prepared to officially declare a recession. This variety of opinions on the issue is a large source of confusion – one website will tell you there is a recession, another will tell you there isn’t.
Currently, Canada is not in a recession. While there is almost a consensus that we will be in one soon, no significant sources have declared one yet. Our GDP has been steadily growing since its last drop in mid-2020 due to the COVID-19 pandemic. Believe it or not, Canada never officially met the criteria for a technical recession – GDP tanked due to the pandemic but quickly bounced back upwards the next quarter (StatCan, 2022). Other economists, think tanks, and councils declared recessions though, considering other factors like job losses and the ongoing lockdowns shutting down the economy (Evans, 2022).
Why are we Headed for a Recession?
The key to the recession that’s almost certainly coming up is inflation, which is at levels that haven’t been seen in years StatCan, 2022). It’s all anyone can talk about right now, and it’s ruining the wallets of everyone in Canada. This inflation has been brewing for a few years now, and the actions required to get it back to normal levels are what will cause this recession.
It’s no secret that the COVID-19 pandemic crippled the Canadian (and global) economy. Suffering from a recession and a pandemic in 2020, the government did two significant things: gave out billions of dollars in financial aid, and set the interest rates as low as they could go without being zero.
The financial aid was so significant that household income actually increased from the end of 2019 to the middle of 2021 (Rosenburg, 2022). Household saving also hit record levels, as people were spending less on the purchases they would have made before lockdown.
At the same time, the low interest rates meant that borrowing money was cheaper than ever. People buying houses and companies financing new projects could do it for pennies, and took out huge loans at these low rates.
When the economy opened back up, people and companies started to really spend this money. I’m sure everyone reading this knows of someone who has bought a new car, house, or boat since the pandemic. Car lots were empty for months, as supply chain shortages clashed with high demand.
So the economy has opened back up, people are spending money, and jobs have returned to pre-pandemic level (Hagan, 2021). It might seem like the economy is in the clear, but that’s unfortunately not the case.
An interesting thing about inflation is that it’s not just caused by printing more money - the money needs to be spent (CFI Team, 2021). This is why inflation was low during the pandemic and has skyrocketed since. Inflation caused by higher spending is called demand-pull, or demand side inflation (Hall, 2022).
There’s also cost-push, or supply side, inflation. This is caused by shortages and issues with the supply chain, which drive prices up even higher. Factories and businesses being shut down played a major role in this.
While we have mostly made it through the pandemic, we’re now dealing with the consequences of the actions the government needed to take to avoid the economy getting totally destroyed, the biggest of which is inflation. As a government, the best way to deal with inflation is through raising the interest rates – the ones that have been ultra-low for the past couple of years (Bank of Canada, 2022). It won’t stop there, either.
When banks have to pay more for their money, they pass those costs on to the people that come to them for loans. Inevitably, people who were considering a new house or car purchase will think twice when they realize that the payment will be far more than it was a year ago. The same goes for companies that want to build new factories, and even the province wanting to build new roads. By jacking up interest rates, the government hopes to stop people from borrowing and slow down the flow of money that’s causing one part of inflation.
While stopping the flow of money and reducing inflation is necessary in the long run, it will cause a recession in the short-term. When spending decreases, GDP decreases, sending us right towards that technical recession. This is the bottom line of what’s to come – the government knows that raising interest rates will almost certainly cause a recession, but has no other choice to combat the inflation that’s hurting the economy in other ways.
How Likely is a Recession?
Unfortunately, very likely. Almost every major economic source is saying that a recession is probably in Canada within the next year. Economic powerhouses like RBC and Scotiabank are saying with full certainty that we will have one in 2023 (Punchard, 2022.RBC, 2022).
Inflation hit 7.7%, and the Bank of Canada wants to bring it back into the target range of 2%. A historical study was done and identified three times that this was done successfully by raising interest rates. Each time, the economy entered a recession (MacDonald, 2022).
Canada is trapped between two hard options, inflation and recession. If the government wants to avoid a recession, inflation will stick around and prices will continue to soar. If it wants to slow the growth of prices, the economy will need to be sent into a recession.
How Scared Should I Be?
Despite how terrible this all sounds, don’t let these rate hikes scare you too much. This situation is not sending the economy into any situation it hasn’t been in many times before. There will likely be a recession, but economists are predicting that it will probably be very mild (Siekierska, 2022).
The overnight rate in Canada was at historic lows even before the pandemic hit. Normal levels are 4-5%, meaning that despite nonstop talk about rate hikes for the past year, it's still at a relatively low level. Do not look at these rates and think they will stop you from ever buying a car or a house – they have been far higher in the past. The overnight rate hit almost 20% in the early 80s, and in the 90s it never went below 5% (Statcan, 2022).
As a student coming out of school and entering the economy as a working adult, your outlook is not as bad as you might think. Job vacancies are still very high across Canada, and the price of housing is predicted to fall (Siekierska, 2022.Altstedter, 2022.) High interest rates mean it’s expensive to borrow, but they also mean you earn more on every dollar you save.
Cited Sources:
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Bank of Canada. (2022, September 7). Bank of Canada increases policy interest rate by 75 basis points, continues quantitative tightening. Bank of Canada. Retrieved October 23, 2022, from https://www.bankofcanada.ca/2022/ 09/fad-press-release-2022-09-07/
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By: Justin Myers
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