Here’s why experts say Canada isn’t headed for a recession

Canada’s annual inflation rate hit 7.7 per cent for the month of May, according to data released by Statistics Canada on Wednesday, the highest level of growth seen in nearly 40 years. Some Canadians may be worried that rising inflation will cause a decline in economic activity, and eventually lead to a recession.

Michael Veall is an economist at McMaster University in Hamilton (Ont.). Looking at the latest levels of economic activity in Canada, the country isn’t currently in a recession, he saidIt is unlikely to ever experience one.

“If real [GDP] growth is negative for two successive quarters, that’s formally a recession,” Veall told CTVNews.ca in a telephone interview on Tuesday. “It’s clear that we’re still in a period of bounce-back growth from the pandemic.”

Veall identifies a key characteristic of economic recessions as a high unemployment rate. said, but the most recent data from Statistics Canada shows the country’s unemployment rate is at an all-time low of 5.1 per cent.

Negative economic growth is also a hallmark of recessions. said TD Bank senior economist James Marple. According to TD Bank’s most recent forecast published on Monday, Canada’s economic activity is expected to slow down dramatically in the months to come, Marple said. The bank predicts that real GDP growth will be at an annualized rate 4.4 percent by June. This number will then drop to three percent by the end the third quarter and to 1.6 percent by the end 2022.

Even though Canada has experienced lower levels of economic growth, it does not mean that Canadians will be in recession. said.

“The battle is between resiliency and recession,” he told CTVNews.ca on Tuesday in a telephone interview. “We have a very healthy labour market … [and]Our economy is recovering from the COVID pandemic in many ways. People are now returning to work after staying at home for two-years.

“Even with a slowdown in economic growth, it wouldn’t be a recession.”

ROLE OF RISING INTEREST RATE

Most of the economic pain Canadians are likely to experience in the coming months won’t be tied to real GDP growth or unemployment rates, but high levels of inflation, Veall said. Canadians already feel the pinch from higher prices at gas pumps and grocery stores.

The Bank of Canada increased its key interest rates over the past few months in an effort to reduce rising inflation rates. Although the benchmark interest rate currently sits at 1.5 per cent, the country’s central bank has saidCanadians can expect to see this rate rise as the government tries to keep inflation below two percent.

Canadians will be more likely to pay interest repayments rather than to invest that money in the economy. saidDavid Macdonald is a senior economist at the Canadian Centre for Policy Alternatives. This can reduce spending on goods or services, which can help to reduce demand and inflation.

“Increasing interest rates takes some of the air out of the economy,” Macdonald told CTVNews.ca in a telephone interview on Tuesday. “So you could potentially see fewer people going on vacation, for example, and maybe the cost hotels comes down, or maybe the cost of going out to eat comes down because fewer people are going out to eat.

“These are means by which inflation can come down.”

TD Bank expects that the next rate hike, which will take place on July 13th, will result in an increase of 75 basispoints, Marple said. This is similar in nature to the actions taken by US Federal Reserve earlier this month, which raised its key rate by 0.75 percentage point. The Bank of Canada has so far increased its policy rate by 25 or 50 basis point each year. But, an increase in inflation will likely put more pressure on the central banking to raise this rate quickly, Marple said. said.

“It’s just reflective of the fact that the bank recognizes that they need to act now to bring down inflation,” he said. “There’s no point in waiting.”

Some economists predict that the central bank’s key overnight lending rate could reach as high as 3.25 per cent by the end of this year. But, it remains to be determined if rapidly rising interest rates will cause economic growth slow down enough to become negative, potentially triggering a recession. said. Veall says that this is unlikely.

“The Bank of Canada is correct in doing something – the unfortunate part is that something has a painful side,” Veall said. “The hope is that they can slow growth by just the right amount so that the economy continues to grow.

“I think the odds are in our favour.”

INFLATION IS ‘THE INDICATOR TO WATCH’

Macdonald will be closing by the fall said it should be clear whether or not the central bank’s interest rate hikes are helping to reduce inflation. If the annual inflation rates remain high, the bank will likely revise its target interest rate between two and three percent and may seek to increase it further in the future. He believes that an engineered recession could be triggered if interest rates rise too quickly. said.

“That move that we’ll probably see in the fall will tip us off to whether the bank will cause a recession in order to get inflation under control,” Macdonald said.

However, if inflation starts to fall while economic activity continues its growth, this will likely help calm any fears about a possible recession. said Marple.

“The worries about recession … are hinged around the ability of the Bank of Canada to bring inflation to heel,” he said. “Inflation is the indicator to watch … If we start to see some good signs that that’s happening without too much economic deterioration, that should give some hope that we can avoid a recession.”

While experts think Canada is unlikely to experience a recession soon, others believe that the Canadian and American economies will both be in serious decline by next year. According to Veall, it’s likely that if the United States is hit with an economic recession, Canada will see one too, considering how closely tied each country’s economy is to the other.

Aside from this, it’s also important to consider the impact that international factors have on Canada’s economy. Russia’s invasion of Ukraine, for example, is fuelling a rise in gas prices across Canada that is contributing to inflation, Macdonald said. Uncertainty around how the crisis will continue to impact Canada’s economy means that the possibility of facing a future recession can’t be ruled out entirely, Veall said.

“Odds are that we will not have a recession … within the next 18 months,” Veall said. “But you can’t dismiss the possibility.”

EXERCISE CAUTIONS AND EXPLORE OPTIONS

Veall advises people who are concerned about weathering a possible recession in the coming years to be more cautious with their personal finances and to carefully consider whether major purchases can be made if they lose a job.

“This will partly depend on the precarity of one’s employment, what assets and savings one has, [and]What type of purchase? [they’re making],” Veall said. “It’s always wise to try to be in a position to ride out economic misfortune.”

If you are looking for higher wages, Macdonald is the right time to ask for a raise or change jobs. saidInstead of waiting six months or one year, ask for it immediately. Workers may be discouraged to ask for wage increases if Canada is in recession. said.

“This is one of the dangers of a recession, is that it locks in lower real wages as a result of this inflationary surge,” Macdonald said. “Now’s the time to ask for better conditions [and]Better wages Lock those in now, prior to the risk of another recession.”

It is a good idea to have a budget in place for large purchases such as buying a house. said Macdonald. Macdonald. said.

“In the long run, you’d be paying the mortgage for longer and you’d pay more interest over the life of the mortgage, but it’s not that these are unmanageable changes,” Macdonald said.

Canadians can expect to see the housing market cooling down more in the coming year, Marple states. said. He says that increasing interest rates will result in further decreases of average home prices month-overmonth. saidFor Canadians who are looking to buy property, it can be beneficial to use the.

“It’s increasingly turning what was very much a seller’s market into what could very well become a buyer’s market,” Marple said. “We expect to see a bit of a decline in home prices over the next little while.”