What would a Canadian recession look like? Experts weigh

With inflation on the rise and central banks poised to raise rates to combat it, Canadians are asking a major question about the state of our economy: will there be a recession and what will it look like? she ?

A recession is defined as two financial quarters of declining economic activity.

RBC predicts the Canadian economy is on track for a “mild recession” in 2023, with variables such as real estate, unemployment insurance claims and the delayed economic ramifications of pandemic restrictions driving GDP growth less than 1%.

WHAT IS A “LIGHT RECESSION”? »

“There are different shades of recession – from gray to deep black,” Sal Guatieri, senior economist and director at BMO Capital Markets, told CTVNews.ca in a phone interview Monday.

“Our view is that we’re going to come out of this quite lightly. We expect the economy to contract for a quarter next year and maybe stagnate later this year. That would be called a growth slump.”

A “growth recession,” Guatieri explained, is a term for when the economy is so weak that the unemployment rate increases by about 1% over two years.

“The economy, for the most part, would still be expanding, but not enough to provide jobs for all the new people entering the workforce,” he said.

As for staffing shortages contributing to inflation, it forces companies to pay more — not only to attract new workers, but also to retain current staff, Guateri told CTVNews.ca in an interview in July. .

This, in turn, can add to the chain reaction of rising costs, he explained. But if companies can no longer afford to pay workers, fewer jobs become available. Rising costs and shrinking labor compound the problem.

Guiatieri acknowledges that other forecasters are predicting a deeper recession.

“It depends on how deep. How big is the decline in GDP? If it’s only about 1%, I’d say it’s pretty mild. And it also depends on how long. Is it only a few quarters or is it spread over several quarters?If it’s just a couple that would fall into the soft camp.If it’s more, then, of course, you could go into a more standard recession.

On average, he said, recessions tend to cause GDP to contract by around 3%, with the unemployment rate rising by around 3% or more, “and that happens over multiple quarters.”

Finally, he explained, there is the “Great Recession”.

“That’s what you had in 2008, when the economy is contracting quite significantly – four or five percent over many quarters. And when the unemployment rate is going up more than three percentage points.”

According to RBC’s Special Housing Report, as a rise in interest rates has a ripple effect on the Canadian economy, factors such as real estate – with an estimated 12% drop in prices homes next year – can lead to lower wealth and, therefore, lower economic activity.

On their site, RBC says this recession would be “short-lived by historical standards – and may be reversed once inflation stabilizes enough for central banks to cut rates.”

If inflation falls quickly, the Canadian economy could be heading for what is called a “soft landing”.

WHAT IS A “SOFT LANDING”?

Investopedia, a financial education website, defines a “soft landing” as “a cyclical slowdown in economic growth that avoids recession.” The term is attributed to central banks’ goal of raising interest rates just enough to keep an economy from overheating with high inflation.

“Soft landing can also refer to a gradual and relatively painless downturn in a particular industry or economic sector,” Investopedia explains.

Economists believe a soft landing is not out of the question as post-pandemic demands continue to fuel the recovery in a few sectors, RBC said in a report.

“Canadians continue to fuel a recovery in the travel and hospitality sectors. And rising global commodity prices have boosted the mining sector. But companies are struggling to find the workers they need to expand production.

So while Canadians continue to feel the economic impact of gas pumps and groceries, the recession may be “mild,” but the economic reality – with staff shortages, higher costs and less wealth – won’t. won’t seem so weak.

There is a word for that. This is called a “vibecession”.

WHAT IS A “VIBECESSION”?

The term was coined by Kyla Scanlon, writer and influencer, and is attributed to public interpretation of economic realities.

Scanlon argues that “how you feel adds to how everyone else feels,” she said, arguing that consumer sentiment is a major driver of GDP growth.

“We take experience and evidence, shape expectations, which distort perception and act as a coercion for interpretation,” she wrote on her site.

“So when people are feeling bad (which they are right now), they can cut some aspect of their spending – which we’ve seen. Inflation is the bogeyman in the room.”

WealthSimple, which broke down the concept of “vibecession” in a newsletter, sees the concept as the inverse of a soft landing.

In the context of the Canadian economy – with high mortgage payments and rising grocery bills – a “vibecession” would ultimately result in inflation falling enough to prevent central banks from raising interest rates. interest, while maintaining consumer confidence across the country, WealthSimple explained.

During the telephone interview, Guiatieri pointed out that “there are other [economists] that forecast a real recession – a two-quarter decline in GDP, or a broader decline in economic activity.”

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