The risk for Quebec of entering a recession has recently increased without this becoming the most probable scenario for the moment. But it’s never too early to warn. The Press sought advice from economists on how governments, businesses and households should react in anticipation of a possible prolonged downturn in the economy.
Posted at 5:00 a.m.
The fight against inflation
Already, in the United States, gross domestic product fell in the first quarter and consumer confidence is at an all-time low. This is not yet the case in Canada. Export Development Canada (EDC) forecasts real growth of 3.7% in 2022 and 2.2% in 2023. More pessimistic, RBC has lower growth forecasts, but which remain in positive territory.
In fact, if there was a recession, it would be induced by the fight against inflation, explains Serge Coulombe, professor emeritus of economics at the University of Ottawa.
“The possible recession is a side effect of the medicine that central banks have begun to use to fight inflation,” he said. They fight inflation by raising interest rates. The objective is to increase borrowing costs in order to generate an economic slowdown which could also be a recession. The goal is to calm the economy, which is currently booming. »
A recession is negative economic growth for at least two consecutive quarters.
While waiting to find out whether or not the country will fall into recession, the specialists we spoke to are urging governments to moderate their spending.
Premier Legault’s $500
“Governments need to stop increasing spending in real terms so as not to harm the efforts of central banks trying to put out the fire,” argues economist Olivier Rancourt of the Montreal Economic Development Institute ( IEDM), think tank favorable to economic liberalism.
Scotiabank, in a report released last week, along with economists Serge Coulombe of the University of Ottawa and Robert Hogue of the RBC, whom we spoke to, are in much the same taught.
The classic example of what not to do is the $500 we got in Quebec. It is a pure and simple money injunction in the economy. From an individual point of view, it may help temporarily, but it creates more money in the economy, which feeds inflation.
Olivier Rancourt
On the left of the political and economic spectrum, Yvan Duceppe, accountant and treasurer of the Confederation of National Trade Unions (CSN), differs in opinion.
He asks the Bank of Canada to act with discernment. Much like with the zero deficit, the 2% inflation target should not become a religion.
In anticipation of the recession that is looming on the horizon, Mr. Duceppe would like governments to prepare an investment plan focused on the sectors of the future, in particular the decarbonization of the economy.
Instead of $500 checks sent to everyone, the accountant by profession is in favor of new targeted assistance which could, for example, take the form of an expansion of eligibility for the Housing Allowance program, intended to low-income households.
Boost supply
From a completely different perspective, senior investment adviser Allan Small recommends that the government stimulate supply, since inflation is first and foremost caused by the lack of supply, according to him.
“Governments need to find a way to increase the supply everywhere: energy, work and food,” says the financier, whose Toronto firm is attached to iA Private Wealth Management.
In this sense, he would be in favor of concluding an agreement on Ukraine that would allow agricultural production to leave the region. In terms of manpower, Mr. Small suggests lifting all restrictions on unvaccinated staff. When it comes to energy, he believes the answer must come from the United States, because the lack of new pipelines limits Canada’s ability to get its oil and gas to markets that need it.
Gas tax cut
President Joe Biden has announced a temporary federal gasoline tax cut in the United States. Professor Serge Coulombe would be in favor of the Canadian provinces following suit. “A temporary gas tax cut or a temporary sales tax cut is a possibility,” he said.
“Lowering the gas tax would be a way of softening the impact of inflation on the population,” adds Olivier Rancourt, of the MEI.
For his part, Robert Hogue, deputy chief economist of the RBC, disapproves of this approach because it would run counter to Canada’s efforts to reduce its greenhouse gas emissions.
Households in debt
For their part, households seem out of breath even before the arrival of a possible recession, underlines Mr. Rancourt. Heavily indebted, they are vulnerable to a rise in interest rates, mortgage rates in particular; hence the idea of adjusting the budget now in anticipation of an increase in the cost of borrowing.
What’s more, inflation erodes the purchasing power of workers since wages do not increase at the same rate as the rise in prices, deplores Mr. Duceppe, treasurer of the CSN.
“The number one enemy is inflation,” maintains Serge Colombe. It affects everyone all the time. The impact of a recession is more limited. It affects fewer people, but these people are harder hit. He expects less fortunate households to protect themselves by cutting back on discretionary spending in the event of a recession.
RBC’s Robert Hogue imagines that households will seek to increase their income in order to balance their budget. “People who bought their homes at a high price in recent years may want to earn additional income by renting out their basement or part of their home, and doing renovations to prepare their residence accordingly. »
To invest or not?
Although they have seen all the colors during the pandemic, Canadian companies generally have a healthy balance sheet, says Stuart Bergman, economist at EDC. The structure of the Canadian economy, based on energy and the extraction of natural resources, works in favor of the country. A matter of concern, “our businesses depend on a more indebted consumer than south of the border,” he notes.
“If companies detect a drop in demand for their products, they must adjust quickly and clean up their balance sheets as much as possible to get through a more difficult period,” recommends Robert Hogue.
RBC’s deputy chief economist would be surprised to see a massive postponement of investment. “Usually, investments are not influenced by very short-term economic cycles; most of the time, an investment responds to long-term trends,” he argues.