Many times announced, this recession which still does not come would be imminent. Based on the predictive reliability of its model of leading indicators for the Canadian economy, Oxford Economics sees the next quarter as the entry point.
Admittedly, the Canadian economy is surprising at the start of the year, with a job market that remains vigorous and GDP growth flirting with 3% after two months. According to data from the Institut de la statistique du Québec, Quebec’s real GDP stagnated in February after posting a slight increase of 0.1% in January. In Canada, we are talking about an increase of only 0.1% in February, marking a net deceleration compared to the monthly variation of 0.6% measured in January. The cumulative change in real GDP over the first two months of 2023 amounts to 1.3% in Quebec and 2.8% across Canada compared to the same period last year.
But beyond this macroeconomic reading, on the ground inflation and the high cost of credit hit households and businesses in a very felt way. The latest reading, the BDO Debt Solutions Affordability Index released Thursday indicates that 56% of Canadians (62% of Quebecers) are adjusting to inflation and the rising cost of living in reducing their living expenses.
In more detail, nearly 60% of respondents believe they need to reduce non-essential spending to cope. A third (30%) of Canadians feel so overwhelmed by their debts that they do not know what to do, adds the specialized firm. This feeling of being overwhelmed by debt is higher among those aged 18 to 34 (45%), lower among those aged 55 and over (13%).
Duplicate
They are therefore always more likely to resort to additional or on-demand work, particularly among young people. Still according to the trustees’ firm’s survey, 38% of respondents would accept a side job to have greater financial independence, 35% to pay for their basic needs, 30% to save for a major purchase, such as a house, and 27% to pay off their debts. And nearly a quarter (24%) are already relying on extra work to supplement their income.
Looking ahead, economic conditions being what they are, the sharp deterioration in general lending conditions in the first quarter, with a tightening of credit conditions for households and businesses, is likely to add to the effect of monetary austerity and to weigh on economic activity, hiring and inflation. As for the financial room for maneuver of households, inflated during the pandemic, excess savings have become the prerogative of higher incomes.
Recession at the turn
For Oxford Economics, the table is set. Despite a good start to the year, its probability model using a series of leading indicators points in the direction of a recession within the next six months for Canada. The economic analysis firm is rather proud of the performance of its model. Excluding the pandemic and the 2015 regional oil shock-induced recession, it has correctly predicted all recessions since the late 1970s, she says. The crossing of the threshold announcing a contraction in economic activity has now exceeded that reached during the last four out of five recessions (excluding the pandemic). In doing so, on average, the recession begins four months after this overshoot, which indicates that it is imminent.
All indicators except one flash red. “In April, our model gave an 84% probability of a recession over the next two quarters. This is the highest percentage since 1980 and far above the percentage of 60% obtained before four of the last six recessions,” underlines Oxford.
Regarding the resilience of the labor market, she recalls that this market is a lagging indicator. Thus, the latest employment data would project the state of the economy that prevailed at the end of 2022. The rapid deterioration in credit conditions should also be noted. On this point, the organization for economic cooperation and development also has an indicator showing good efficiency in identifying the inflection point in the business cycle. In Canada, this point was crossed last year as credit conditions tightened.
Overall, after the Bank of Canada’s sharp hike in key rates, the country’s financial environment has become the most restrictive since the 2008 financial crisis. Oxford also points out that it takes between four and six quarters for the full impact of monetary austerity affects the economy. It should thus be fully felt from the second half.
If all turns out, according to the prevailing scenario, the recession will be moderate and short-lived. Two to three trimesters. But OK.