A tight labor market and high level of savings during the pandemic will cushion the impact of a recession on Canadians, according to a new report from Deloitte.
In its most recent economic outlook report, Deloitte forecasts that Canada will enter a short-lived recession by the end of the year. Rising interest rates will cause a significant economic slowdown, and inventory accumulation will push the economy into a technical recession, the financial advisory firm said.
However, because the labor market is so tight, the unemployment rate may not rise as much as it typically would during a recession, said Deloitte chief economist Craig Alexander. For Canadians, that’s what will matter most, he said. “Nobody eats GDP. From the perspective of Canadians, what really matters is what happens to their jobs and their income,” said Mr. Alexander.
Towards an unemployment rate of 6%
According to Deloitte forecasts, the unemployment rate will reach 6% in the third quarter of next year, before falling again. Canada’s unemployment rate was 5.4% in August, up from its record low of 4.9% in June.
Alexander said the companies he spoke to were still concerned about ongoing labor shortages. Given the current difficulties in hiring, he explained that employers would not be inclined to lay off workers even in the event of an economic downturn, as long as it is temporary. “If a recession hits, [les entreprises] will likely continue to want to hoard labor because of the difficulty in finding workers with the skills they need,” he said.
While economists are divided on the possibility of Canada entering a recession, an economic slowdown is widely expected due to rising interest rates. The Bank of Canada has raised its key rate five times since March, bringing it to 3.25%. Even though inflation slowed to 7% in August, the central bank is still expected to raise interest rates in October. As the Bank of Canada strives to bring inflation back to its 2.% target, rising interest rates will translate into higher borrowing costs, which should slow economic activity.
Signs of a slowdown
Some early signs of a slowdown are already visible, including falling house prices and three consecutive months of job losses.
The Deloitte report says household consumption will decline as the downturn continues, but for households that have accumulated savings, their spending won’t be affected as much. According to Statistics Canada, households saved more than a quarter of their disposable income in the second quarter of 2020. By comparison, the savings rate was just 2% a year earlier.
While the household savings rate has since declined, it remains high compared to pre-pandemic levels. Households with higher incomes are generally considered to have higher savings rates.
“The inflationary environment we find ourselves in right now is absolutely penalizing for low-income Canadians. So there is a very big aspect of inequality in [cela], said Mr. Alexander. But for middle- and high-income households, what we’re seeing is that even if the cost of living goes up for them, they can easily afford it and still spend. »