The economic climate will be gloomy this year, but without us falling into recession… At least, not as we usually understand it… And as far as we can predict it.
Interest rate increases of the magnitude and speed of those decreed by central banks for almost two years to bring soaring inflation in line are putting such a brake on household consumption. and business investment that they almost inevitably lead to periods of recession, economists reminded all last year.
And yet, even if economic activity is expected to continue to slow in 2024, most advanced countries should also achieve a “soft landing” and avoid recession, predicted the Organization for Economic Co-operation and Development (OECD) at the end of November. This should be true for Canada, for which the OECD predicted modest growth of 0.8% this year, compared to 1.2% last year and 3.4% in 2022. “But this outcome is far from being guaranteed, wrote its chief economist, Clare Lombardelli. The relationship between inflation, activity and labor markets has changed, making it difficult to fully assess the impact of tightening monetary policies. »
The impact of rates
The Bank of Canada estimates that it takes between 18 and 24 months before its interest rate increases and decreases have their full effect on economic activity. The Canadian economy is considered more sensitive to these variations in the cost of credit than those of the United States or Europe, notes University of Ottawa economist Serge Coulombe, due in particular to the shorter terms of credit. mortgage loans and the higher debt rate of Canadians. “And for many people, this is the first time they’ve seen interest rates this high.” »
However, initiated in March 2022 and today equivalent to 4.75 percentage points, the increase in interest rates in Canada has yet to materialize for half of borrowers, who have still not had to renew their loan mortgage, noted in an analysis in December the chief economist of the Desjardins Movement, Jimmy Jean.
Monetary policies explain at most 10% of recessions, however, estimates Professor and co-holder of the Chair in Macroeconomics and Forecasts at the Department of Economic Sciences at UQAM Dalibor Stevanovic. However, its statistical models predict that when the latest trends in yield curves, inflation, economic sentiment and housing starts are taken into account, the probability of a recession this year is expected to rise to 60%. in Canada, 70% in the United States and 90% in Quebec. But when we add to the calculation the state of health of the job market and the unemployment figures, the prognosis is reversed and we conclude that there is a low risk of recession for the next two years.
The strength of employment
“It’s the elephant in the room,” says the expert. We have an economy that lacks workers and which will continue to lack them for several more years. If people still have jobs and don’t lose their homes, even in an economic downturn, it’s hard to call it a real recession. »
An economic slowdown is nonetheless underway in Quebec. To the point where, after two consecutive quarters of negative growth, some were speaking, at the end of 2023, at least of a “technical recession”. “There is no such thing as a technical recession. Either the economy is in recession, or it is not. And the Quebec economy is not, in recession,” insists Dalibor Stevanovic, who adds that its current slump was becoming inevitable after several years of growth above its potential.
The rest of the Canadian economy seems to be doing a little better, but we must be wary of the gross domestic product (GDP) measure alone, noted just before the holiday season Marc Desormeaux, senior economist at Mouvement Desjardins. If the “dizzying” increase in the Canadian population, thanks in particular to immigration, has made it possible to maintain a certain economic growth, we realize that Canada is grappling with a decline which is not not that far removed from previous recessions when considering GDP per capita.
The cost of living
As inflation has fallen significantly since exceeding 8% in June 2022 and is moving ever closer to the upper limit of the Bank of Canada’s target range of 1% to 3% , it is likely that the central bank will announce its first interest rate cuts this year, thinks Serge Coulombe. But be careful, he said. There will be no question of bringing them as low as they were before the COVID-19 pandemic. “At least, not for years.” »
The increase in the cost of living over the last two years will not be erased, continues the expert. Worse, we can expect inflationary pressures to remain higher than before, particularly because after decades of trying to squeeze maximum savings from globalization, companies and countries are now favoring chains of shorter and safer value, but more expensive too.
“The year 2024 will be the first full year of the post-pandemic era,” noted an analysis by the Royal Bank last month. Inflation, interest rates and a sluggish economy will force consumers to curb their spending, push some businesses, especially small ones, into bankruptcy and force governments to impose more fiscal and budgetary discipline. strict.
Two certainties
Everyone will have to continue to deal with a context that is, if not more uncertain, at least more risky, explains Dalibor Stevanovic. “It’s not the same thing,” he argues. The uncertainty is like at the start of the pandemic or the financial crisis of 2008. As we did not know what awaited us, no one dared to do anything. Today, we are rather faced with risks, that is to say we have a good idea of the threats that await us and what they could cost if they materialize.
Among the many risks weighing on the Quebec and Canadian economies, several come from outside. Among those most often cited, we find: the performance of the American and Chinese economies, the wars in Ukraine and the Middle East, the result of the American elections and climate disasters.
While some are still trying to find the label that will best suit the Quebec economy in 2024, the Institut du Québec described the whole thing as a “semantic debate” last month. “In fact, what is important to remember is that this pause in activity will be relatively modest” and temporary, he recalled. The mistake would then be to get distracted and lose sight of the main long-term challenges on which Quebec must remain focused. That is to say the green transition and the problem of labor scarcity, as well as the issues of immigration policies, productivity and public finance management linked to it.
With Clémence Pavic