This text is taken from the Courrier de l’économie of October 24, 2022. To subscribe, click here.
The word recession is on everyone’s lips, and few analysts do not see it on their forecast radar. The particularly severe monetary tightening by the Bank of Canada should do its job.
Note that the increase in the key rate reached 300 basis points this year, from 0.25% to 3.25%. At least 50 additional points should be added on Wednesday. However, analysts are more likely to point to a 75-point tightening, despite recent statistics indicating that inflation growth slowed in September for a third month in a row.
They note that, despite this happy sequence, inflationary pressures remained generalized last month. The central bank must also deal with the decline of the Canadian dollar against its American counterpart and with a Federal Reserve of the United States maintaining high pressure on the cost of money. Have !
However, the target rate would sink deeper into the restrictive rate zone. We are talking, here, of a zone extending beyond the so-called neutral rate comprised in the interval of 2 to 3% — i.e. the rate compatible with production which is maintained durably at its potential level and a rate inflation rate remaining on target.
In short, with a recession that seems inevitable, it now remains to know its extent and duration.
First, what is a recession?
The International Monetary Fund points out in a note that there is no official definition, but that most commentators and analysts use as a working definition the classic of at least two consecutive quarters of real GDP decline. The Bank of Canada, for which a recession is defined as a sustained and generalized decline in economic activity, of which GDP is the most general measure, therefore sticks to it.
In the United States, it is up to the National Bureau of Economic Research (NBER) to declare it officially. “A recession is the period between a peak in economic activity and its nadir,” writes the NBER on its website, which points out that “a recession involves a significant decline in economic activity, widespread across the economy and which lasts longer than a few months. It emphasizes three criteria—intensity, magnitude, and duration—and their interchangeability. In other words, although each criterion must be satisfied individually to some degree, the extreme conditions revealed by one criterion can partially compensate for the weaker indications of another.
In Canada, the CD Howe Institute can serve as a reference. Its Business Cycles Council analyzes the economy to establish whether there really is a recession. It approximates the NBER definition by linking a recession to a pronounced, persistent and widespread decline in overall economic activity, using GDP and employment as its main measures.
But the federal Balanced Budget Act retains the definition of at least two consecutive quarters of negative real GDP growth that Statistics Canada reports under the Statistics Act. So here we go with that.
Then, what does the story teach?
According to data from CD Howe, Canada has experienced 12 recessions since 1929, excluding 2015. Canada then officially entered a recession, by the classic definition, as a result of falling oil prices. Given the regional dimension of this recession, CD Howe does not officially recognize it.
A dozen recessions, therefore, since the Great Depression, whose duration varies between 3 and 9 quarters if we disregard the exceptional period of the 1930s. If we also forget that of 2020, which concentrated ultimately over two months (March-April) under the shock of the pandemic and the suspension of entire sections of the economy. It will have been the shortest but the most severe since 1929, with a plunge in GDP of 13%.
And the next?
The next one, scheduled to start in the fall according to most scenarios to cover the first half of 2023, should cut 1.8% from peak-to-trough GDP, if we use the Oxford Economics target. If this is the case, then we would speak of a moderate recession. In comparison, during the recessions of the last fifty years, the average contraction has been 2.5% and the average duration, three quarters.
In terms of job losses, Oxford Economics puts the figure at 200,000 between the second quarter of 2022 and the third of 2023, compared to some 400,000 during the 2008-2009 recession. This foreseeable recession has the particularity of taking place in a still tight labor market context with, in particular, employers who were actively seeking to fill 964,000 vacant positions in July.
In its most recent forecasts, Desjardins Group indicates that most provinces should experience a slowdown over the next two years. “No province will therefore be immune to the dampening effect of interest rates, runaway inflation, the rapid correction of the housing market and the deterioration of the global expansion. »
The expected slowdown in the Quebec economy has only just begun, and the coming quarters will be even more difficult. The Desjardins Leading Index is now in a critical zone that usually precedes a period of recession. Consequently, it could begin at the turn of 2023, write the economists of the institution. Quebec’s real GDP growth, forecast at 3.8% this year, should only be 0.1% for 2023 as a whole.