Economists see Canada heading for recession
Pandemic, inflation, rates cited in poll
Brace yourself, Canadians. As if soaring inflation, rising interest rates, a pandemic and a war in Ukraine weren’t enough, pretty soon we could be adding a recession to our list of troubles.
A majority of economists surveyed by Toronto-based research group Finder say Canada is headed for a recession, and we can expect it to hit anywhere between 2023 and the first part of 2024. Most believe it will happen during the first six months of 2023, and another quarter think it will take a year to manifest.
The economists cite the pandemic, inflation and interest rate hikes among reasons why Canada is ripe for a downturn.
Finder explained how economists are attempting to time the downturn. According to one expert, Canada is due for a normal summer as pandemic restrictions lift, but a new COVID-19 variant is likely in the cards for the fall, setting us on the path to a recession by this time next year.
“Once everyone gets their fun out of their system, the crash will not be far behind, especially in the face of a subvariant that will place pressures on businesses and the health-care system again,” Moshe Lander, a senior lecturer of economics at Concordia University told Finder.
Inflation, which hit 6.7 per cent in March and rose on the fastest pace since January 1991, will also bite. That’s putting pressure on the Bank of Canada to keep interest rates moving higher, adding to recession risks.
Indeed, many economists told Finder they expect “aggressive” rate hikes in the year ahead. Of those surveyed, a majority believe we will see at least four more interest rate increases this year.
Those rising rates, coupled with inflation, will lead us into a downturn starting in the last six months of 2023, Philip Cross, senior fellow at Macdonald Laurier Institute, said. Savings socked away by households during the start of the pandemic will keep the economy afloat in the meantime, he said.
But timing the recession isn’t easy, and a lot rests on what happens with Russia’s ongoing invasion of Ukraine, said another economist. Murshed Chowdhury, an associate professor at the University of New Brunswick, expects the downturn will hold off until the first part of 2024.
“(It) largely depends on how prolonged the supply-side issues will be and the escalation for the Russia-ukraine war,” he said.
Still, for all the economists who think a recession is close at hand, another 41 per cent think we aren’t due for one for at least another two or three years. That’s the view of Derek Holt, vice president and head of capital markets at Scotiabank. He said it’s all in how you read the U.S. Treasury yield curve.
Usually, an inversion of the yield curve is seen as a recession indicator. Yields on the two-year Treasury went higher than the 10-year Treasury at the end of March, traditionally seen as signalling a looming downturn. But Holt said investors should be looking at a different part of the curve to make such predictions — and it’s looking pretty healthy at the moment.
“Research by Federal Reserve economists shows that the best yield curve predictor of recessions is more likely to be signalling a boom rather than a bust,” he said. “That indicator is the spread between the 90-day Treasury bill yield and what the market thinks that yield will be 1.5 years from now.”