Opinion | Here’s why the so-called ‘hurricane’ of recession is unlikely in Canada – Waterloo Region Record

Written by Amanda

Opinion | Here’s why the so-called ‘hurricane’ of recession is unlikely in Canada  Waterloo Region Record

If the biggest issue for everyday Canadians today is inflation, the chief worry of financial markets is that we’re headed for a recession.

The mounting concern about a recession next year or in 2024 is mostly based on a fear that the Bank of Canada and other central banks will act too aggressively in fighting inflation. They will raise borrowing costs high enough to slow economic growth, tipping the economy into recession.

Jamie Dimon, CEO of JPMorgan Chase & Co., startled financial markets last week in warning that an economic “hurricane” is “coming our way.”

Recession forecasts are plausible because when central banks launch interest rate-hiking cycles, as our bank did earlier this year, recessions often follow.

Bearish economists who think a recession forecast is too risky are warning of coming “stagflation,” or stagnant economic growth with resulting high unemployment accompanied by continued above-average inflation.

After two years of unpleasant pandemic surprises, a looming recession or bout with stagflation don’t seem to be far-fetched prospects.

And yet, it’s a return to normality that beckons, not a recession or even stagflation. Here are some reasons why.

Inflation relief is on the near horizon

As noted, recession forecasts are based primarily on a fear that aggressive central banks will crash the economy to subdue inflation. But they won’t do so. They won’t need to.

Most economists expect the inflation rate to be cut in half by this time next year. Inflation will start its decline in the meantime, ending the year in Canada below four per cent, down from about seven per cent now.

That means the bank can halt the increases to its benchmark lending rate at two per cent by December — an eightfold increase this year — and let inflation come down further on its own. That’s far short of its benchmark rate of 3.5 per cent that might indeed push the economy into recession.

Canadians are helping drive down inflation. Consumer sentiment surveys show households cutting back on dinners out, vacations, and big-ticket purchases like houses, cars, appliances, and furniture.

Consumers will help power the next phase of recovery

Canadian households still have an estimated $300 billion in pandemic savings to invest and spend. The economy has also been posting historically high wage gains of 4.5 per cent to 5.5 per cent, providing still more economic stimulus.

Pent-up demand is higher in Canada than the U.S., in part because of stricter and more widespread pandemic protections north of the border.

Which means that in 2023 and 2024, when a recession is said to be likely, Canadians will be spending again, taking advantage of lower prices and greater variety as product shortages are curtailed.

Pent-up demand for cars alone, noted here earlier this week, could be sufficient stimulus to keep a recession at bay.

And corporate Canada, which entered the pandemic recession with a strong balance sheet, will also be spending more robustly.

That includes constant or increased hiring, as Canada’s labour shortage eases with the addition of about 1.2 million New Canadians between 2021 and 2023.

Finally, the same soaring food and fuel prices that are a hardship for Canadian consumers are boosting Canada’s export revenues of those and other commodities. That’s creating jobs and enabling resource provinces to strengthen their finances.

These unusual times will end

Today’s high inflation results from a remarkable confluence of negative factors whose staying power is limited. In Canada, the norm is sustained economic growth with low inflation.

Between 1990 and 2020, the average annual rate of inflation was two per cent. During that same three decades, Canada’s economy tripled in size, to $2.2 trillion.

To believe that a return to the norm will be interrupted by a recession is to discount some “green shoots” of recovery.

For instance, supply chain efficiency is already beginning to improve. An historically tight Canadian labour market will loosen with a labour force participation rate that has increased 1.1 per cent above the level before the pandemic. (That rate is still down 0.6 per cent in the U.S., where inflation is running a point higher than Canada.)

And shortages of critical materials will not continue indefinitely. The U.S. is recapturing its self-sufficiency in semiconductors, for instance, with scores of billions of dollars devoted to building new chip factories. (Chip shortages are a culprit in shortages and high prices of cars and other essential goods.)

And Europe is meeting with growing success in obtaining energy products from sources other than Russia.

The bearish prognosticators are not Cassandras. We’ve been living in a “hurricane” for a long time, and new dangers must be heeded. But we are adjusting to the storm. And the preponderance of evidence still points to clear skies ahead.

Source: therecord.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai

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