Experts Weigh In on Canadian Economic Recession Fears

Photo Credit: David Kawai/Bloomberg via CBC

As inflation and interest rates remain high in Canada, many economists and financial analysts are warning Canadians of an economic recession that is bound to happen sometime this year.  

The Governor of the Bank of Canada, Tiff Macklem, shared before the House of Commons finance committee that the potential recession is “not going to feel great. But it is not going to feel what people think of when you say the word recession.”

An economic recession is a provisional period of time when the economic activity of a country declines. During this time, a country faces declines in wages and incomes, decreases in international trade and higher unemployment rates. 

Economists aren’t able to predict the exact time of occurrence of a recession. According to the Royal Bank of Canada (RBC), most economists use indicators like inflation rates, mortgage rates, and other variables to estimate when a recession will occur. 

Randall Bartlett, senior director of Canadian economics at Desjardins, told Global News that human behaviour can hasten the arrival of a recession. When households and businesses are expecting a recession, they can change their spending and investment habits, which can turn the recession into a self-fulfilling prophecy.

One of the causes of economic recessions is the high inflation rates of a country. The Bank of Canada defines inflation as a continuous increase in prices over time. According to Forbes, high inflation rates can cause businesses to increase their prices for commodities and reduce production.

Currently, the inflation rate in Canada is 6.32 per cent, significantly higher than the target goal of 2 per cent, according to the Bank of Canada. Since economic disruptions like the rise of COVID-19 and the war in Ukraine, Canada's exports, such as oil, have fallen. These factors, alongside the pressures of global inflation, have increased the cost of producing and exporting these commodities. In addition, companies need to pay more for employment.  

Trying to lower inflation rates in Canada, the Bank of Canada has raised interest rates eight times since March 2022. In a press conference on Jan. 25 this year, the central bank announced that they are increasing interest rates to 4.5 per cent from 4.25 per cent. This 0.25 per cent increase is the “fastest rise in a generation,” according to an opinion piece by The Globe and Mail. 

Officially, the interest rate the Bank of Canada is increasing is called the overnight rate. When financial institutions such as banks need to balance out their debts overnight, they borrow money from each other. The overnight rate is the interest rate that banks charge each other for these loans.

Raising interest rates helps lower inflation rates in an economy in many ways. According to a statement from the Bank of Canada, higher interest rates make borrowing money through loans more expensive, allowing more Canadians to save and prevent excessive spending. As a result, companies and organizations either increase their prices slowly or lower them in the hope of encouraging demand. In response to people spending less, the cost of these commodities will decline.  

Canadians across the country should acquaint themselves with these inflated costs as most financial analysts are predicting that the worst is yet to come before things get better. Mark Carney, former governor of the Bank of Canada, stated in an interview with BNN Bloomberg that interest rates are unlikely to decrease anytime soon due to high inflation rates.  

In January, Canada’s inflation rate dropped down to 5.9 per cent,  lower than the 6.2 per cent economists were predicting, according to CBC. This decline won’t lower interest rates in Canada as food prices in the country are continuing to rise.

The Bank of Canada is projecting to bring down CPI inflation to three per cent by the middle of 2023 and two per cent in 2024.  

CPI inflation, abbreviated from Consumer Price Index, depicts the changes in costs Canadian consumers encounter according to Statistics Canada. A fixed basket of goods (including components such as shelter and food prices) and services are compared over time to measure price changes.  

According to Statistics Canada, the annual average CPI (excluding energy) grew 5.7 per cent in 2022 analogized to 2.4 per cent in 2021. Everyday commodities Canadians use was significantly impacted in 2022: transportation increased by 10.6 per cent, food increased by 8.9 per cent and shelter grew by 6.9 per cent.  

“In Canada, the economy remains overheated and clearly in excess demand,” Macklem commented in the press conference. Macklem explained that if inflation rates continue to rise this year, the Bank will raise interest rates even more.  

According to the The Globe and Mail, raising interest rates may lower inflation rates, but it also increases the risk of a recession. Higher interest rates make borrowing money more expensive, which could lead to fewer people engaging in this level of economic activity, according to the Bank of Canada. Less engagement in economic activity through borrowing and spending money, can be a factor in the causation of a recession.

Unemployment rates skyrocket during recessions, and it was expected that this factor would hit Canada hard, but data suggested otherwise. In January, employment for most full-time workers rose to 150,000 (0.8 per cent) since December 2022, according to Statistics Canada. Canada has been on a streak of increasing its employment rates since September 2022. Since then, Canada increased its employment rates to approximately 1.7 per cent. The increase in January boosted the employment rate of people aged 15 and older to 62.5 per cent. This rate was last recorded in April and May 2019.  

Bank of Montreal (BMO) Capital Markets chief economist, Doug Porter, shared with Yahoo Finance, “the job market is one of the last elements of an economy to turn, when things are slowing down. That is, the unemployment rate is a bit of a lagging indicator.”  

As reported by Global News, BMO “revised its call for a recession” as statistics published by Statistics Canada showed that a recession may be looming, but not as soon as most economists had anticipated. 

 “The reality is, I think labour markets are going to do quite well through this [challenging period of negative growth],” said Pedro Antunes, chief economist at the Conference Board of Canada, in a news report by The Toronto Star.  

Other economists, such as Mark Carney, view this data differently. He warns Canadians that the economy still has momentum, but it’s misleading. Despite the decrease in unemployment rates and the actions that the Bank of Canada is taking, he said, the economy is indeed heading toward a recession.

Carney’s warning is showing signs of accuracy as one of the largest components impacted by an economic recession is beginning to be affected: the housing market. According to statistics from The Canadian Real Estate Association, the Home Price Index (HPI) declined 12.6 per cent in January compared to the previous year. Most would think this is a positive outcome, however, a decline in housing prices while interest rates are high produces higher mortgage rates, according to a statement from BMO.

 In this case, there is a substantial proportion of a Canadian’s mortgage allocated toward interest and less going toward principal. The process of paying back a mortgage balance will take longer than anticipated as amortization periods may increase. This can decrease demand in housing markets as most buyers can’t afford mortgages, which contributes to recessionary conditions.