A bit of positivism for this beginning of March. While many fear an economic slowdown over the next few months due to the successive increases in interest rates which will slow down economic activity, several signals suggest that the risks of recession are fading for 2023. We would therefore have a little respite before the advent of the apocalypse.
The recent publication of certain economic statistics does indeed seem to show that the risks of a recession occurring during the year are lower than many analysts predicted.
On Tuesday, Statistics Canada told us that economic growth was zero during the fourth quarter of 2022, while analysts were expecting growth of 1.6% and the Bank of Canada 1.3%.
Economic activity even pulled back by 0.1% in December due to the sharp decline in business investment in their inventories.
This poor fourth quarter therefore foreshadowed a deterioration in economic conditions for the start of 2023 and, who knows, perhaps paved the way for a recession.
But, according to preliminary data from Statistics Canada, the increase in domestic demand, fueled by consumer spending, in particular the increase in automobile sales, helped to put Canadian GDP back into positive growth by 0.3% in January.
In its latest provincial economic outlook, also published on Tuesday, the Conference Board of Canada for its part foresees a slowdown in economic activity in the country, but dismisses the scenario of a recession for 2023.
Incidentally, it is in Quebec that economic growth will be among the weakest in the country, with anticipated growth in Quebec’s GDP of 0.2% in 2023 and 2.0% in 2024, while growth of 0.5% for Ontario in 2023 and 2.5% for 2024.
We all agree that these are not encouraging economic prospects. The Canadian economy and the Quebec economy will slow down sharply during the year, but at least they seem able to avoid falling into negative mode and thus spare us the pangs of a recession, for 2023 to the very least.
Monitoring of recession indicators
It was the publication last week of the most recent recession indicator monitoring table, regularly published by the National Bank’s Economics and Strategy team, that made me realize that it was very plausible to rule out the scenario of a recession for 2023.
Each week, National Bank reviews 17 US economic and financial indicators to measure the risks of recession by comparing their value with those observed three months before the last eight recessions (from the 1970 recession to that of 2020).
We are talking about financial data and commodities, such as the price of copper or that of oil, subjective data such as the confidence of consumers, SMEs, CEOs and finally hard data such as jobless claims, hours worked or building permit.
In the National Bank’s latest statement, two of the five economic indicators that were in predicting recession mode are now in acceptable mode. We are talking here about real consumption and the non-manufacturing production index.
Moreover, indicators that were in a more critical situation, such as hours worked and jobs in temporary help services, also show better readings.
This is confirmed to me by Alexandra Ducharme, economist at the National Bank, co-responsible for the publication of these tables for monitoring recession indicators.
“Yes, the latest chart reveals positive surprises with stronger than expected indicators, and this only confirms our forecast as we do not anticipate a recession for 2023, but a definite slowdown. In particular because American consumers are more resilient than some had estimated, ”explains the economist.
Mme Ducharme specifies, however, that this forecast is limited to the year 2023, because the situation could very well change in 2024 if the American and Canadian central banks do not manage to curb inflation as they wish.
The big unknown remains inflation and the impact on economic activity of the recent interest rate hikes decreed in recent months and the next hikes that could occur if the situation does not recover quickly.
François Trahan, renowned stock market strategist on Wall Street, recently made several media appearances to announce that the American economy would soon turn into a veritable apocalypse due to the too sharp and too sudden rise in interest rates in the United States.
According to Trahan, US monetary authorities have been too slow to respond to soaring inflation and have raised rates recklessly, which will inevitably push the US economy into recession.
Having often discussed with François Trahan, I know that he tends to favor pessimistic scenarios, but it was nevertheless he who, in May 2000, was the first to warn investors and the markets against the imminence of the bursting of the bubble of technology stocks. He was right, his pessimism was not gratuitous and not listening to him cost many people dearly.