According to some economists, the Bank of Canada’s efforts to contain sustained inflation increase the chances of pushing the economy into recession next year.
Consumers need to start preparing for the contraction now, experts say, as the threat of layoffs and weaker days looms on the horizon.
Armine Jalnizian, an economist and associate at the Atkinson Institute, told Global News that the chances of a recession “are approaching more than 50% over the next six to 12 months.”
Canadian economic output is showing mostly signs of growth this year. But Yalnizyan cites the contraction of the United States economy in the first quarter of 2022 and the increase in applications for unemployment benefits south of the border as signs that economic cooling may come north sooner rather than later.
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“I think it’s very difficult for Canada to get out of the recession when the United States has a quarter shrink,” she said.
1:36 Freeland not sure if Canada will go into recession in the coming years Freeland is not sure if Canada will go into recession in the coming years – June 16, 2022
James Orlando, a senior economist at TD Bank, agrees with Yalnizyan that there is an “incredible level of synchronization” between North America’s neighbors.
He, like many economists at major banks, believes the Bank of Canada will follow the example of the US Federal Reserve in raising interest rates by 75 basis points in its next announcement on July 13.
As Statistics Canada reports that its annual inflation rate rose to 7.7% in May, the central bank will be pressured to act quickly and show Canadians that it will take the necessary steps to stifle inflation, he said. Orlando.
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TD Bank’s economic forecasts, published last week, show a significant slowdown in consumer spending by the end of 2022 and the beginning of next year.
TD believes the slowdown will circumvent negative growth, but Orlando says Bank of Canada will have a “very thin margin of error” as it raises interest rates to avoid a recession – economists at the sweet spot call a “soft landing” . ”
“He is effectively reducing demand to such an extreme, to such a level that he hopes inflation will turn around and return to the target. We need to make sure that it does not crush the economy as it goes through this process, “he said.
Orlando, however, notes that recessions usually follow tariffs.
“They are designed to slow down demand,” he said.
What does recession mean?
The onset of a recession is usually marked by two consecutive quarters of negative growth in the country’s gross domestic product.
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The housing sector, which has already shown signs of slowing and falling prices in some markets, is particularly vulnerable to rising interest rates used to curb inflation.
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“Overall, this (rising inflation) increases the chance of a recession when you raise interest rates to the point where homes are affected, where growth is generally affected,” said Alan Small, senior investment adviser at IA Private Wealth Week. interview with The Canadian Press.
Observers say fears of a recession are already affecting markets, with TSX’s energy reserves hit last week.
While Canada’s oil and gas reserves are performing extremely well for most of 2022 due to Russia’s invasion of Ukraine and the consequent disruption of global energy supplies, Small said this week that some investors are beginning to worry that a broad-based recession – if it happens – will bite off growing demand.
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“When you have a recession or a fear of a recession, it basically slows everything down. So the demand side of the equation is starting to decline, “he said. “You don’t have such a big imbalance, you’re more balanced if people don’t travel so much and don’t move so much.”
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In addition to hurting consumer demand, the higher the interest rates, the more business will be pressured. That could lead to layoffs, Yalnizyan said.
“The bigger problem with raising central bank interest rates is whether they make it more expensive for companies with large leverage to borrow. This will cool the rate at which they hire, and some companies that have been overly leveraged may start cutting people. And that’s the part we’re worried about, “she said.
“Whether this happens in sufficient numbers to be problematic is the head that is still unwritten… but this is not the direction you want to go at all, because your best hedge against inflation, as a household, is good job.
It’s time to “slam the hatches”
If Canada is really heading for a recession, Orlando says the positive news is that the last few years have been good for the average consumer.
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Job growth is high, the average household managed to save a lot during the pandemic, and those lucky enough to break into the housing market have seen their equity grow rapidly.
These factors could help isolate Canadians against rising interest rates and high inflation, Orlando said.
“There is a buffer, which is the stock of Canadian savings, which we hope will be able to withstand some of these headwinds that almost everyone faces,” he said.
Read more: Fears of a recession are growing. Here’s how younger Canadians can prepare
But Sprott School of Business professor Ian Lee told Global News recently that a recession or not is now the time to “slam the hatches” as the Canadian economy enters a period of “great uncertainty.”
Accounts such as mortgage payments and hydro accounts will have to be prioritized in the coming months, as will groceries. Everything else should be discussed for reduction or elimination, he said.
“It means reducing unnecessary costs, frivolous costs,” he said.
“Save that money for the rainy day and the thunderstorm we think is coming.”
– with files by Anne Gaviola from Global News and The Canadian Press
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